[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





                         MORTGAGE FRAUD AND ITS

                       IMPACT ON MORTGAGE LENDERS

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   HOUSING AND COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                            OCTOBER 7, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-116



                    U.S. GOVERNMENT PRINTING OFFICE
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
SPENCER BACHUS, Alabama              MAXINE WATERS, California
MICHAEL N. CASTLE, Delaware          CAROLYN B. MALONEY, New York
PETER T. KING, New York              LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
RON PAUL, Texas                      JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
DONALD A. MANZULLO, Illinois         JAY INSLEE, Washington
WALTER B. JONES, Jr., North          DENNIS MOORE, Kansas
    Carolina                         MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California                 HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin                KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania      JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona             STEVE ISRAEL, New York
VITO FOSSELLA, New York              MIKE ROSS, Arkansas
GARY G. MILLER, California           CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania        JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia  JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota           BRAD MILLER, North Carolina
TOM FEENEY, Florida                  RAHM EMANUEL, Illinois
JEB HENSARLING, Texas                DAVID SCOTT, Georgia
SCOTT GARRETT, New Jersey            ARTUR DAVIS, Alabama
TIM MURPHY, Pennsylvania             CHRIS BELL, Texas
GINNY BROWN-WAITE, Florida            
J. GRESHAM BARRETT, South Carolina   BERNARD SANDERS, Vermont
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
JIM GERLACH, Pennsylvania

                 Robert U. Foster, III, Staff Director
           Subcommittee on Housing and Community Opportunity

                     ROBERT W. NEY, Ohio, Chairman

MARK GREEN, Wisconsin, Vice          MAXINE WATERS, California
    Chairman                         NYDIA M. VELAZQUEZ, New York
RICHARD H. BAKER, Louisiana          JULIA CARSON, Indiana
PETER T. KING, New York              BARBARA LEE, California
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         BERNARD SANDERS, Vermont
DOUG OSE, California                 MELVIN L. WATT, North Carolina
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEPHEN F. LYNCH, Massachusetts
GARY G. MILLER, California           BRAD MILLER, North Carolina
MELISSA A. HART, Pennsylvania        DAVID SCOTT, Georgia
PATRICK J. TIBERI, Ohio              ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida
RICK RENZI, Arizona


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 7, 2004..............................................     1
Appendix:
    October 7, 2004..............................................    45

                               WITNESSES
                       Thursday, October 7, 2004

Amiri, Brigitte, Staff Attorney, South Brooklyn Legal Services, 
  Brooklyn, NY...................................................    30
Donohue, Hon. Kenneth M. Sr., Inspector General, Department of 
  Housing and Urban Development..................................     3
Matthews, William, Vice President and General Manager, Mortgage 
  Asset Research Institute, Inc., Reston, VA.....................    24
McCall, Marta T., Senior Vice President-Risk Management, American 
  Mortgage Network, San Diego, CA, on behalf of the Mortgage 
  Banker Association.............................................    26
Prieston, Arthur J., Chairman, The Prieston Group, San Rafael, CA    28
Swecker, Chris, Assistant Director for Criminal Investigations, 
  Federal Bureau of Investigation................................     5
Trujillo, Ecima, National Field Director, ACORN Housing 
  Corporation, Los Angeles, CA...................................    33
Weicher, Hon. John C., Assistant Secretary, Housing/Federal 
  Housing Commissioner, Department of Housing and Urban 
  Development....................................................     9

                                APPENDIX

Prepared statements:
    Ney, Hon. Robert W...........................................    46
    Clay, Hon. Wm. Lacy..........................................    48
    Amiri, Brigitte..............................................    49
    Donohue, Hon. Kenneth M. Sr..................................    55
    Matthews, William............................................    63
    McCall, Marta T..............................................    72
    Prieston, Arthur J...........................................    79
    Swecker, Chris...............................................    90
    Trujillo, Ecima..............................................   102
    Weicher, Hon. John C.........................................   111

              Additional Material Submitted for the Record

Consumer Mortgage Coalition, prepared statement..................   120
Fannie Mae, prepared statement...................................   126
Sysdome, prepared statement......................................   136

 
                         MORTGAGE FRAUD AND ITS
                       IMPACT ON MORTGAGE LENDERS

                              ----------                              


                       Thursday, October 7, 2004

             U.S. House of Representatives,
                        Subcommittee on Housing and
                             Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 10:03 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Robert W. Ney 
[chairman of the subcommittee] presiding.
    Present: Representatives Ney, Miller of California, Hart, 
Tiberi, Renzi, Waters, Velazquez, Carson, Lee, Watt, Scott, and 
Davis.
    Chairman Ney. Today, the Housing Subcommittee meets to 
discuss mortgage fraud and its effect on mortgage lenders.
    The subcommittee, along with Chairman Bachus' Financial 
Institutions Subcommittee, conducted a number of hearings 
concerning abuse of lending practices, subprime lending and how 
to ensure credit availability for those who need it and want 
it.
    During these previous hearings, topics revolved around 
addressing fraudulent schemes and how it affects the individual 
consumer. However, consumers are not the only ones affected by 
abusive lending practices. Financial institutions and other 
lenders, also victims of mortgage fraud, lose millions of 
dollars each year through this type of problem and corruption.
    Some studies have shown that between 10 and 15 percent of 
all home loan applications include some home loan fraud or 
misrepresentation. Lenders can choose to absorb the loss and 
reduce earnings that harm stockholders or charge higher 
consumer fees to recoup those losses.
    Government-insured loans that fall victim to fraud end up 
being paid at the end of the day by the taxpayers. The examples 
of this fraudulent behavior include elaborate schemes, straw 
buyers, fake credit histories, inflated appraisals, fabricated 
pay stubs and falsified tax records.
    Of today's witnesses--we are happy to have all the 
witnesses today--but one of today's witnesses from the Federal 
Bureau of Investigation has stated that mortgage fraud has 
become, potentially, a national epidemic that could expose 
lenders to hundreds of millions of dollars in losses. And, of 
course, those losses go down the line and affect everybody.
    As a result, the Bureau has targeted a variety of fraud 
schemes through its Operation Continued Action, the largest 
nationwide operation in FBI history, directed toward organized 
groups and individuals who are engaged in mortgage fraud.
    From its inception in August of 2004 through this month, 
Operation Continued Action investigators have identified more 
than 245 subjects and 158 investigations in 37 States. More 
than 151 indictments have been filed to date. These charges 
have thus far led to more than 144 arrests, convictions and 
sentences and millions of dollars in forfeiture and 
restitution.
    The United States mortgage market is the deepest and most 
affordable in the world due to the evolution of unique funding 
structures for mortgages, and Americans pay less for mortgages 
than almost any other country. As a result, this country has 
the world's highest home ownership rate.
    Today's hearing is another important step, as we attempt to 
find common ground with comprehensive solutions to the problem 
of abuse of lending. I would also note, without objection, that 
the record will be open for 30 days for members to ask 
additional questions of the panel.
    And with that, I would yield to Mr. Scott. Thank you for 
joining us.
    Mr. Scott. Thank you very much, Mr. Chairman. I want to 
thank you, Mr. Chairman, for holding this hearing on the 
subject of mortgage fraud and certainly want to extend a 
welcome to all the distinguished members of the panel.
    This hearing is important to me because as the Mortgage 
Asset Research Institute will discuss today, my State of 
Georgia has surpassed California and Florida as the State with 
the highest mortgage fraud scores. In his written testimony, 
the HUD Inspector General provided an example of mortgage fraud 
in DeKalb County in Georgia. This particular incident occurred 
just outside of my district, and represents just one of many 
anecdotal stories of mortgage fraud and predatory lending in 
the metro-Atlanta area.
    Most mortgage scams are caused by a small number of local 
fraudulent loan operators. However, the mortgage scams run by 
these small operators cause enormous pain for their victims. 
While mortgage fraud may be a huge problem, it pales in 
comparison to the devastation experienced by individual 
homeowners who are victims of predatory lending. I am concerned 
that there is no way to know the exact level of mortgage fraud.
    Several witnesses in their testimony identified the lack of 
information as being a problem for preventing mortgage fraud. I 
am very pleased that the FBI has increased its investigations 
into mortgage fraud, and I believe that Congress should give 
the FBI the necessary resources to expand their operations.
    With the FBI's primary focus on homeland security, Congress 
must also strengthen existing laws to help State and local 
investigators share the workload of investigating mortgage 
fraud.
    In addition, Congress must continue to promote financial 
literacy efforts, which is a strong priority of this committee.
    I look forward to hearing from today's witnesses on the 
ways to investigate, to prosecute and to stop mortgage fraud. 
And I want to certainly recognize William Matthews of the 
Mortgage Asset Research Institute, who is a witness today, and 
his company is a subsidiary of ChoicePoint, which is based in 
my district in Atlanta, Georgia.
    Thank you very much, Mr. Chairman. I yield back my time and 
look forward to a very informative hearing this morning from 
our distinguished panels.
    Chairman Ney. I want to thank the gentleman.
    Also, without objection, we have written testimony for the 
record--hearing no objection--from the National Association of 
Home Builders, Kevin Coop, and Consumer Mortgage Coalition.
    We have been joined by the gentleman from Ohio, and--he has 
left, the gentleman from Ohio. He will be back.
    With that, we begin the panel.
    Kenneth Donohue is the Inspector General of the United 
States Department of Housing and Urban Development. He has a 
distinguished 21-year career, serving as a Special Agent with 
U.S. Secret Service, and he later served as Chief of the 
Investigation Section of the Resolution Trust Corporation. He 
is a Certified Fraud Examiner and a Certified Protection 
Professional.
    Chris Swecker is the Assistant Director of the Criminal 
Division at the Federal Bureau of Investigation, having been 
named to this position by Director Mueller in July. Mr. Swecker 
joined the FBI as a Special Agent in 1982. He served in the 
FBI's Legal Counsel Division in the Organized Crime and 
Narcotics Office. He was designated Special Agent in Charge of 
the Charlotte Division in 1999.
    John Weicher, Assistant Secretary for Housing, Fair Housing 
Division, at the Housing and Urban Development, a position he 
has now held since June of 2001. He has been here several times 
on the Hill.
    We welcome you back.
    Prior to the appointment at HUD, Mr. Weicher was Director 
of Urban Policy Studies at the Hudson Institute. He also served 
as a member of the Millennial Housing Commission.
    We want to welcome all the witnesses today.
    I would note our most famous previous FBI agent was 
Chairman Mike Oxley of Ohio, so I had to note that.
    With that, we will begin with you, Mr. Donohue.

 STATEMENT OF HON. KENNETH M. DONOHUE SR., INSPECTOR GENERAL, 
   UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Donohue. Chairman Ney, and other members of the 
subcommittee, it is my pleasure to testify before you today on 
the HUD Inspector General's perspective on mortgage fraud and 
its impact on financial institutions. Of all the homes 
purchased in the United States each year, 8 percent are 
financed with FHA mortgage insurance. Each year, FHA accounts 
for 30 percent of all insured mortgages. FHA has fallen off 
nearly 20 percent from the same period a year ago. FHA-insured 
mortgages may be more prone to mortgage fraud because FHA 
insures mostly first-time home buyers with limited credit 
history and little money down.
    A closer look at the make-up of the FHA portfolio would 
indicate that FHA's insurance risk is increasing. A comparison 
of active insured FHA cases to FHA claims cases over the past 2 
years shows an increasing claim rate.
    As you can see from our chart, our investigative workload 
has increased in more than 450 open criminal, single-family 
investigations, and our arrests in the single-family mortgage 
area have increased 800 percent in a 4-year period. We believe 
there is a direct relationship between our increased workload 
and the FHA's increasing claims rate.
    The annual audit of the Federal Housing Administration 
financial statement has found the FHA in basically sound fiscal 
condition. FHA's claim rate, however, continues to rise each 
year, and with fewer FHA mortgage applicants, there is less 
premium income to cover the claims.
    A future economic downturn and future interest rate 
increases would provide opportunities for those who would prey 
upon homeowners who cannot make their mortgage payments. We 
repeatedly have found unlawful and deceptive practices and 
outright fraud in mortgage lending that often exploit first-
time and uninformed FHA borrowers.
    Of particular concern is illegal profiteering on the 
purchase and quick resale of homes called ``property 
flipping.'' the illegality arises because one or more parties 
to the transaction conspire to inflate the value of the home 
and pocket the excessive profits at loan closing.
    Another concern is ``equity skimming.'' A common form of 
equity skimming involves an investor who exploits a homeowner 
facing foreclosure and other financial stress.
    Mortgage fraud can go undetected, and not all fraud results 
in loss to the government. This makes it difficult to quantify 
the exact amount or even the estimated amount of mortgage 
fraud.
    Every month one in every nine FHA mortgages is reported as 
delinquent. That means that 600,000 FHA borrowers are a month 
behind in paying their mortgages. Some portion of these 
delinquencies may be due to mortgage fraud and new mortgages 
where the underwriter intentionally misrepresented the 
borrower's ability to pay the mortgage.
    The following are two examples that combine OIG-FBI 
investigations of ``property flipping'' frauds and the results 
of a recent audit of mortgage fraud:
    Three conspirators preyed on unwitting FHA borrowers in 
Chicago's south and west sides, saddling the new homeowners 
with overvalued properties and unmanageable mortgage debt. The 
fraud scheme was a typical flip. The investor would contract to 
purchase a property, recruit home buyers, and then partner with 
a crooked appraiser and attorney to complete the resale and 
closing at an inflated price.
    As you can see from the pictures on the easel, this example 
of one of the properties shows how significantly it declined in 
appearance and how it could potentially impact the surrounding 
neighborhood when one of these fraudulent transactions 
occurred.
    Earlier this year, a 158-count indictment was handed down 
in the Northern District of Georgia. From mid-1999 through 
March of 2004, it was alleged the settlement attorney and 
coconspirators perpetrated a property flipping scam. The 
defendants purchased residential properties primarily in the 
Stone Mountain, Georgia, vicinity and resold them at 
artificially inflated prices, using the proceeds of the resale 
to pay for the initial purchase.
    In a recent audit of an FHA-approved lender, we found the 
lenders were fabricating or altering borrower credit and 
employment documents to make the loans approvable. In this 
audit we found pervasive documents falsifying in 48 of 65, 75 
percent, of the FHA loans originated by a HUD-approved 
correspondent lender in the greater Phoenix metropolitan area.
    Mr. Chairman, I appreciate the subcommittee's concern over 
the increased problem of mortgage fraud. The result of these 
types of financial crimes undermines the confidence in this 
Nation's housing industry and frustrates honest American dreams 
of home ownership. In addition, the victims include the honest 
mortgage company employees that lose their jobs because they 
are victimized by unsavory business practices of other staff, 
the home buyers whose credit was destroyed when they had to 
default on a loan that they really could never afford in the 
first place, or the new FHA home buyer that is paying a higher 
than necessary mortgage premium to cover growing losses to the 
insurance fund.
    Thank you, sir.
    Chairman Ney. Thank you for your statement.
    [The prepared statement of Hon. Kenneth M. Donohue Sr. can 
be found on page 55 in the appendix.]
    Chairman Ney. Mr. Swecker.

   STATEMENT OF CHRIS SWECKER, ASSISTANT DIRECTOR, CRIMINAL 
    INVESTIGATIVE DIVISION, FEDERAL BUREAU OF INVESTIGATION

    Mr. Swecker. Good morning, Mr. Chairman and members of the 
subcommittee. I want to thank you for the opportunity to 
testify before you today about the FBI's efforts----
    Chairman Ney. If you would just move the mike a little 
closer.
    Mr. Swecker.--in combating mortgage fraud.
    Although there is no specific statute that defines mortgage 
fraud, each mortgage fraud scheme contains some type of 
material misstatement, misrepresentation or omission relied 
upon by an underwriter or lender to fund, purchase or insure a 
loan. The Mortgage Bankers Association projects 2.5 trillion in 
mortgage loans will be made this year. The FBI compiles data on 
mortgage fraud through Suspicious Activity Reports filed by 
financial institutions and HUD Office of the Inspector General 
reports. The FBI also receives complaints from the industry at 
large.
    A significant portion of the mortgage industry is void of 
any mandatory fraud reporting. In addition, mortgage fraud in 
the secondary market is often underreported. Therefore, the 
true level of mortgage fraud is largely unknown. The mortgage 
industry itself does not provide estimates on total industry 
fraud. The industry provides incomplete or inconsistent fraud 
data. Based on various industry reports and FBI analysis, 
mortgage fraud is pervasive and growing.
    The FBI investigates mortgage fraud in two distinct areas: 
Fraud for Housing and Fraud for Profit. Fraud for Profit is 
sometimes referred to as ``Industry Insider Fraud'' and the 
motive is to remove equity, falsely inflate the value of the 
property or issue loans based on fictitious properties. Based 
on existing investigations and mortgage fraud reporting, 80 
percent of all reported fraud losses involve collaboration or 
collusion by industry insiders. These schemes involve industry 
insiders to override the lender controls.
    Fraud for Housing represents illegal actions perpetrated 
solely by the borrower. The simply motive behind this fraud is 
to acquire and maintain ownership of a house under false 
pretenses. This type of fraud is typified by a borrower who 
makes misrepresentations regarding income or employment history 
to qualify for the loan.
    In the past 18 months, the FBI has been evaluating the 
effectiveness of its national mortgage fraud program. In June, 
2004, I authorized the consolidation of the mortgage fraud 
program into the Financial Crimes Section of the FBI's Criminal 
Division. Previously, mortgage fraud that impacted government 
programs, for example, HUD, was managed by another section. 
Mortgage fraud affecting financial institutions was managed by 
the Financial Crimes Section. This consolidation provides the 
FBI a more effective and efficient management over mortgage 
fraud investigations.
    Second, I encouraged an overall strategy to address 
mortgage fraud on a proactive basis, utilizing partnerships of 
Federal agencies, State and local law enforcement, regulatory 
bodies and private industry.
    Third, I assured adequate personnel resources were 
dedicated to emerging mortgage fraud problems in regions of the 
country encountering the greatest levels of fraud.
    And finally, the FBI adopted an overall strategy to focus 
on insiders harming the industry in order to disrupt and 
dismantle entire criminal enterprises.
    The FBI defines industry insiders as appraisers, 
accountants, attorneys, real estate brokers, mortgage 
underwriters and processors, settlement/title insurance 
employees, mortgage brokers, loan originators and other 
mortgage professionals engaged in the mortgage industry. 
Through a mandatory reporting mechanism, industry insiders 
would be the front line in preventing mortgage fraud. Zero 
tolerance within the industry, combined with a mandatory system 
of reporting fraudulent activities to the FBI and HUD, would be 
a major step in addressing mortgage fraud.
    The potential impact of mortgage fraud on financial 
institutions in the stock market is clear. If fraudulent 
practices become systemic within the mortgage industry and 
mortgage fraud is allowed to become unrestrained, it will 
ultimately place financial institutions at risk and have 
adverse effects on the stock market. Investors may lose faith 
and require higher returns from mortgage-backed securities, 
which will result in higher interest rates and fees paid by 
borrowers, limiting the amount of investment funds available 
for mortgage loans.
    Often mortgage loans sold in secondary markets are used by 
financial institutions as collateral for other investments. 
Repurchase agreements have been utilized by investors for 
protection against mortgage fraud. When loans sold in the 
secondary market default and have fraudulent or material 
misrepresentation, loans are repurchased by the lending 
financial institution based on a repurchase agreement. As a 
result, these loans become a nonperforming asset, and in 
extreme fraud cases, the mortgage-backed security is worthless. 
Mortgage fraud losses adversely affect loan loss reserves, 
profits, liquidity levels and capitalization ratios, ultimately 
affecting the soundness of the financial institution itself.
    Over the past 5 years, the FBI has implemented new and 
innovative methods to detect and combat mortgage fraud. One of 
these proactive approaches was the development of a property 
flipping analytical computer application, first developed in 
the Washington field office to effectively identify property 
flipping in the Baltimore and Washington areas. The original 
concept has evolved into a national FBI initiative which 
employs statistical correlations and other advanced computer 
technology to search for companies and persons with patterns of 
property flipping.
    As potential targets are analyzed and flagged, the 
information is provided to the respective FBI office for 
further investigation. Property flipping is best described as 
purchasing properties and artificially inflating their value 
through false appraisals. The artificially valued properties 
are then repurchased several times for a higher price by 
associates of the ``flipper.'' after three or four sham sales, 
the properties are foreclosed on by victim lenders. Often 
properties are ultimately repurchased for 50 to 100 percent of 
their original value.
    Other methods we have used include undercover operations 
and wiretaps. These investigative measures often result in 
collecting valuable evidence and provide an opportunity to 
apprehend criminals in the commission of their crimes and 
reduce losses to financial institutions. These proactive 
methods do not preclude historical investigations; however, 
they provide the FBI with additional tools to conduct large-
scale investigations through operational efficiencies.
    As far as trends, there are many mortgage fraud schemes. 
The FBI is focusing its efforts on those perpetrated mostly by 
industry insiders. The FBI is engaged with the mortgage 
industry in identifying fraud trends and educating the public. 
Some of the current rising mortgage fraud trends include: 
equity skimming, property flipping, and mortgage identity-
related theft.
    Equity skimming is a tried and true method of committing 
mortgage fraud and criminals continue to devise new schemes. 
Today's common equity skimming schemes involve the use of 
corporate shell companies, corporate identity theft and the use 
or threat of bankruptcy or foreclosure to dupe homeowners and 
investors.
    Property flipping is nothing new. However, once again, law 
enforcement is faced with an educated criminal element that is 
using identity theft, straw borrowers and shell companies to 
conceal their methods and override lender controls. It should 
be noted that identity theft in many forms is a growing problem 
and is manifested in many ways, including mortgage documents. 
The mortgage industry has indicated that personal, corporate 
and professional identity theft in the mortgage industry is on 
the rise. Computer technology advances and the use of online 
resources have also assisted the criminal in committing 
mortgage fraud.
    The FBI and its law enforcement industry partners are 
working together to identify these trends and develop 
techniques to thwart illegal activities in this area. The FBI 
focuses on fostering relationships and partnerships with the 
mortgage industry to promote mortgage fraud awareness.
    Over the past 2 years the FBI has spoken and participated 
in various mortgage industry conferences and seminars, 
including those sponsored by the Mortgage Bankers Association. 
This year, we will be speaking at and participating in the 
MBA's 91st Annual Convention and Expo. The MBA estimates that 
6,000 industry leaders will attend that conference.
    To raise awareness of this issue and provide easy 
accessibility to investigative personnel, we have provided 
contact information for all FBI mortgage fraud supervisors to 
relevant groups, including the MBA, Mortgage Asset Research 
Institute, Fannie Mae, Freddie Mac and others.
    Additionally, we are collaborating with industry to develop 
a more efficient mortgage fraud reporting mechanism for those 
not mandated to report such activity. This Suspicious Mortgage 
Activity Report or concept is under consideration by the 
Mortgage Bankers Association.
    The FBI supports providing a safe harbor for lending 
institutions, appraisers, brokers and other mortgage 
professionals similar to the provisions afforded to financial 
institutions providing ``safe harbor'' information. The ``safe 
harbor'' provision would provide necessary protections to the 
mortgage industry under a mandatory reporting mechanism. This 
will also better enable the FBI to provide reliable mortgage 
information based upon a representative population in the 
mortgage industry.
    A recent analysis of mortgage industry fraud surveys 
identified 26 different States as having significant mortgage 
fraud problems. Although every survey identified Florida and 
Georgia as having significant mortgage fraud-related 
investigations, the survey also identified nine other States in 
the South and Southwest, seven States in the West and five 
States in the Midwest as having mortgage fraud problems. Once 
again, these studies illustrate the need for increased 
coordination among industry and law enforcement on mortgage 
fraud.
    In conclusion, the FBI is committed to increasing liaison 
and education efforts and partnering with Federal, State and 
local enforcement and private industry to combat mortgage 
fraud. We support new approaches to address mortgage fraud and 
its effects on the U.S. Financial system to include a mechanism 
to require the mortgage industry to report, fraudulent activity 
and the creation of ``safe harbor'' provisions to protect the 
mortgage industry under a mandatory reporting mechanism.
    Mr. Chairman, the FBI looks forward to working with you and 
other members of this committee on solving this problem. I 
thank you for allowing me the opportunity to testify before you 
today, and I will be happy to entertain any questions.
    Chairman Ney. Thank you for your testimony.
    [The prepared statement of Chris Swecker can be found on 
page 90 in the appendix.]
    Chairman Nay. Before we move on to Mr. Weicher, if there 
are any members who would like to submit their opening 
statements for the record, without objection, they will be 
submitted for the record.
    Thank you.
    Chairman Ney. Mr. Weicher.

 STATEMENT OF HON. JOHN C. WEICHER, ASSISTANT SECRETARY, U.S. 
          DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Weicher. Thank you, Chairman Ney, Ranking Member Waters 
and distinguished members of the subcommittee. And on behalf of 
Secretary Jackson and the Department, thank you for this 
opportunity to testify on mortgage fraud.
    Today, I would like to provide you with an overview of 
FHA's initiatives to address this problem.
    Predatory practices can take many forms. Lenders that use 
these tactics often target our most vulnerable populations. 
Predatory loans harm borrowers by making it impossible or 
difficult for them to keep up with payments, and if they miss 
their payments, they risk losing their home, their credit 
standing and their initial investment.
    Predatory lending can rise to the level of criminal 
activity and constitute mortgage fraud, knowingly undertaken by 
individuals intent on profiting at the expense of others. 
Actions include deliberate manipulation of property valuations, 
falsification of borrower financial information, forgery of 
licenses, certifications and titles, and misrepresentation of 
property ownership and conditions.
    FHA monitors lenders for program compliance. During the 
last 4 years, FHA has completed over 3,600 lender monitoring 
reviews. In about 200 of those reviews, we documented 
significant findings that may constitute fraud. By statute, FHA 
refers all potential fraud to HUD's Office of Inspector 
General. Consequently, FHA made 1,345 referrals to the OIG to 
investigate findings of possible fraud during this period.
    Once we make a referral to the OIG, our role is simply to 
work with them, providing them with whatever information they 
may request, such as loan case binders.
    Besides working with the OIG, FHA combats mortgage fraud by 
working to prevent it. In this regard, FHA has made significant 
efforts through consumer education, regulatory reforms and 
enforcement actions.
    HUD believes that our first line of protection is an 
informed consumer. Housing counseling has proven to be an 
extremely localized important activity to educate consumers on 
how to avoid abusive lending practices. In the last 4 years, 
President Bush has doubled the budget for housing counseling 
and Congress has approved. In fiscal year 2004, HUD awarded $36 
million in grants to counseling agencies. These grants will 
assist more than 700,000 people to either become homeowners or 
remain homeowners.
    FHA has also developed new program requirements, 
specifically targeting lending practices to protect all FHA 
borrowers. In this administration, we have published eight 
Final Rules, including an anti-flipping rule and two proposed 
rules, and we are currently drafting five more. I list these in 
my prepared statement.
    And FHA has put in place a series of procedural changes 
designed to deter mortgage fraud, also listed in my testimony, 
such as new guidance on Social Security number verification.
    In addition to establishing more stringent procedures for 
participating in FHA programs, we are taking aggressive action 
concerning business partners that demonstrate poor performance 
and abuse of lending practices.
    We now monitor appraisers based on the risk they pose to 
FHA. Under the approach we inherited from the previous 
administration, FHA spent $46 million over 3 years, but found 
only 97 appraisers to sanction. Under our new ``Appraiser 
Watch'' system, we have spent less than $1 million in the last 
3 years and sanctioned over 300 appraisers.
    FHA has created ``Credit Watch,'' which tracks quarterly 
the default rates for the 25,000 lenders that originate FHA 
loans, and enabled HUD to determine those offices where the 
default rate significantly exceeds the rate in the local area.
    Since ``Credit Watch'' started 5 years ago, FHA has 
terminated 261 lender branches. The industry supports ``Credit 
Watch.'' we sanction the worst performers and create a level 
playing field for those who follow the rules.
    FHA also produces ``Neighborhood Watch,'' a Web-based 
software application which provides lenders with statistical 
views of their performance so they can compare themselves to 
others in their area. ``Neighborhood Watch'' is also used by 
community groups to monitor local lenders and by HUD's OIG to 
identify possible lenders for audit or investigation.
    I hope this discussion of our efforts and accomplishments 
has made clear that the administration and the Department are 
aggressively policing FHA participants and imposing significant 
sanctions on business partners found to be engaged in abusive 
or deceptive behavior. We are firmly committed to protecting 
customers against mortgage fraud.
    Thank you for the opportunity to meet with you today.
    [The prepared statement of Hon. John C. Weicher can be 
found on page 111 in the appendix.]
    Chairman Ney. I want to thank all three of the gentlemen 
for their testimony.
    I wanted to ask a question of Mr. Swecker. Do you, with the 
FBI, just focus most of your time on this, or all of your time, 
on mortgage fraud?
    Mr. Swecker. Within the Criminal Division?
    Chairman Ney. Yes.
    Mr. Swecker. My responsibilities are all criminal--The 
entire criminal program--so it would include violent crime, 
white collar, the whole aspect of criminal violations.
    Chairman Ney. I want to ask a question on the flipping 
aspect.
    What happens if, you know, a person has, for whatever 
reason, bought a property at a lower level--maybe there was a 
divorce, or a person lost their job and they moved out of town 
or whatever--and they bought it; and then they are going to be 
owner occupied, so they didn't have to put as much money down.
    And then they turn around and find out they can sell it at 
a lot higher price. But they don't have a fraudulent appraisal; 
it is not fraudulent, but you know, they buy for 60 and they 
sell for 90.
    Ms. Waters. It is the American way.
    Chairman Ney. I am just wondering.
    Mr. Swecker. That wouldn't fall into the category of 
property flipping.
    Chairman Ney. But if they said they were going to be owner 
occupied, and all of a sudden somebody came around and said, 
look, I will give you 20,000 more for that property, would that 
then be fraud because they said it would be owner occupied, 
turn around and----
    Mr. Swecker. I think that depends on their intent at the 
time they make the representation on the application and to the 
loan originator. I think you would have a hard time proving a 
criminal intent there.
    Chairman Ney. How would you investigate intent?
    Mr. Swecker. Well--you would look at all the facts and 
circumstances. You know, that type of single transaction is not 
where our investigative efforts would be focused. We are 
looking at more systemic-type schemes.
    Chairman Ney. Somebody comes in, has a fraudulent 
appraisal?
    Mr. Swecker. Right.
    Chairman Ney. Tries to make it look like the place is worth 
a lot more?
    Mr. Swecker. That isn't the type of case we would spend a 
lot of----
    Chairman Ney. It is more an organized effort by people to 
do this on a larger basis?
    Mr. Swecker. Correct,correct.
    Chairman Ney. How do you think law enforcement can best, 
you know, combat--and I know this is not everybody in the 
industry; you know, I am fully aware of that. And sometimes--
the purpose of this hearing today is, a lot of times, the 
industry are victims. You also have predatory lending, that is, 
upon a borrower; but in this case, it is fraud coming back up 
to the lender, which can affect a lot of people.
    But how do you think law enforcement can best combat it, 
working through structures of the institutions, the brokers, 
the bankers?
    Mr. Swecker. A combination of things. I think education is 
number one. I think what we have tried to do over the last 
couple months here is to get some awareness, develop it within 
the industry, how prevalent the fraud is, combined with some 
aggressive enforcement action, so that we can get a deterrent 
out there and deter those would-be fraudsters.
    The third part of that is to develop or require some type 
of reporting system, much like the Bank Secrecy Act requires on 
other suspicious transactions. Currently, the banks are covered 
under that, but the mortgage brokers and others in the loan 
origination process are not required to report any type of 
suspicious activity.
    Chairman Ney. One question I have for any of the panelists, 
if the origination volumes decline, do you think then the fraud 
will drop automatically? Does it go hand in hand when there are 
more originations? If it declines, will this historically drop?
    Mr. Swecker. I think it does go hand in hand, but I am sure 
that they will have opinions on this as well. But I think the 
volume itself has created some cover for the unscrupulous 
professionals that are insiders that are involved in these 
fraud schemes.
    So I think if volume did go down, yes, we might see a 
reduction in the fraud schemes.
    Chairman Ney. Any comments, Mr. Weicher or Mr. Donohue?
    Mr. Weicher. I think Mr. Swecker is right about that. I 
think fraud will rise and fall with the market, not necessarily 
proportionally, and the bigger the market the more opportunity 
there is to perhaps get away with something, given the 
resources that are available to combat it.
    Mr. Donohue. Mr. Chairman, I wanted to revisit something 
you asked a moment ago, and that was the process by which these 
cases come to be, and the actions--we, the OIG is a bit unique 
in the fact that not only do we criminally investigate these 
cases and address the civil side, but we also work with the 
Department as far as the Department suspensions.
    I must commend the department, the aggressive nature; we 
have worked collaboratively to deal with these things. I do 
feel, however, these debarments, as egregious as some of them 
may be, may require a permanent debarment for the industry.
    Chairman Ney. A permanent----
    Mr. Donohue. A permanent debarment. I think some of these 
matters--some are so egregious, my concern is that the folks 
that might have caused these problems get back into the 
industry again, and that is a concern that we have seen in the 
past.
    Chairman Ney. Well, my time has expired.
    The gentlelady from California, the ranking member.
    Ms. Waters. Thank you very much, Mr. Chairman.
    You know, I am very appreciative of the time and the 
attention that you give to the subcommittee and the work that 
you do in organizing hearings so that we can be better informed 
and make better public policy.
    Now I wish I could tell you, Mr. Chairman, that I focused--
that this is one of my top priorities, but it is not. I am very 
interested in predatory lending and foreclosures, and I am very 
interested in innocent, hard-working people who get caught up 
in schemes that cause them to lose their homes.
    Now I am glad that you straighten out where you put your 
time and your attention, because I am not interested in a 
desperate would-be homeowner who inflates their income a bit. I 
think what they should be told, when they are making 
application, is that this is a crime and they shouldn't do it. 
I am not interested in people who make mistakes because they 
are desperate, and I essentially hope you don't put your time 
and attention there. And I want you to know that oftentimes 
lenders and brokers are involved in encouraging people to do 
things that may be a violation of law, and people innocently 
follow the advice of their mortgage bankers or brokers and they 
get in trouble.
    So I am not interested in spending a lot of time and 
attention on catching consumers who are stupid or desperate and 
make a mistake or sell their home and get caught up in 
something.
    Now if there are organized efforts and schemes where you 
have, again, the thieves, I guess, or a group organized; and 
they have a particular way that they are creating crimes--I 
mean, they are involved with fraud and ripping off, then that 
is something else. And I didn't know that that was a big 
problem. I mean, I am worried about mortgage bankers and 
brokers who do second and third and fourth mortgages and who 
flip the loans and increase--and the consumer has no way of 
paying off those loans. They don't even know who they sell the 
loans to. Now I consider that more than predatory lending. I 
consider that a kind of organized fraud, particularly when some 
of these mortgage companies have a reputation for doing that.
    So, I mean, if this committee hearing today, Mr. Chairman, 
is about fraud that has been committed by innocent people who 
fall into these schemes who are desperate and who make 
mistakes, I have got to go. But if it is something else, I will 
try to stick around.
    I don't know what to ask you. What are you doing here? What 
do you have to tell us?
    Chairman Ney. We would like to have you either way, here, 
but, you know, we will see what he says.
    Ms. Waters. I would like to stay, but----
    Mr. Swecker. I would like for you to stay.
    We don't focus our resources on the individual, unwitting 
borrower who has been sort of caught up in a scheme. Our focus 
is on the industry insiders. I mentioned the two types of 
frauds, fraud for housing, fraud for profit. Most of our 
efforts are focused on the fraud-for-profit type of violation.
    We are looking for something that is more systemic than 
just an unwitting individual borrower who has been caught up in 
a situation. Maybe they went along with it because they were 
unsophisticated, but that is not our focus at all. We don't 
have the resources to engage in that type of single transaction 
investigation. Our focus is clearly on the insiders and the 
schemes.
    Ms. Waters. I want you to know that my staff also focused 
on flipping, and it is not the kind of flipping that I normally 
talk about. I talk about flipping by the lenders who flip the 
loans and increase the interest rates and all of that. They 
kind of focused on flipping in terms of buying properties, 
putting some paint on them and fixing them up and putting them 
back on the market.
    Mr. Swecker. Right.
    Ms. Waters. Now, again, you know, I am not sure that that 
is fraud as they have been describing it to me. You know, it is 
kind of the American way. You buy something cheap and you sell 
it for more and you make a property--and, as I understand it, 
that house that you fix up will not sell for more than the 
market will bear in the neighborhood where you are selling it. 
So if you buy a run-down piece of property in a neighborhood 
where the houses are selling for $200,000, and you pay, you 
know, $75,000 for it and you fix it up, and you sell it for 
$200,000, I don't consider that fraud. You know, and I--you 
know, I discussed that with my staff.
    Is there something in that kind of flipping that I don't 
know about that you consider fraud?
    Mr. Swecker. What you describe is not fraud. I can't speak 
for HUD, but I think I know what they would say and will say. 
We don't focus on those individual quick transactions where 
somebody has worked hard, put some sweat equity in the house 
and made a profit. That is not where our resources are going to 
go. Our resources are going to go, as I said, on the industry 
insiders. If somebody has consented to be a straw buyer, that 
is a different story.
    Ms. Waters. I don't want to exceed my time, but if you 
could give me one example of what you do, what you are talking 
about. Who are you trying to catch?
    Mr. Donohue. Would you like me to--Chairwoman, a perfect 
example of this is when we see a pattern in the southwest part 
of the United States, when we see folks come in across the 
border and come in to buy, you know, come in to experience the 
good life. And what happens is they are often approached by 
suspected wrongdoers that go back up and suggest that they can 
get into a house, and they get into it for a great price. And 
they occupy these homes--and, of course, many of these people 
are already illegal immigrants into this country. They get into 
these units, the information is provided to them, often 
fraudulent information, fraudulent Social Security numbers and 
the rest, false information about earnings and the rest. And 
what happens, they get into these units--and there is quite a 
number of these cases.
    Our focus, as the FBI has just spoken about, is not on 
those individuals occupying those units. The focus is on the 
people who are gaining the ill-gotten proceeds from that event.
    We often call upon those very arguments as witnesses for 
our cases involved. That is the focus. That is--it is a 
substantial amount of that. It goes on; and, quite frankly, 
some of these people occupy those homes and stay in those homes 
for some period of time and paying on those mortgages----
    Ms. Waters. How many of those kinds of cases have you 
prosecuted?
    Mr. Swecker. All the cases, the examples that we have 
given, are cases involving insiders, where there has either 
been a fraudulent appraisal or there has been some type of 
fraud or fraudulent act on the part of insider. So in the 
circumstances you are describing, only if they had got a 
fraudulent appraisal would you see us go after somebody who was 
just trying to put some sweat equity into a house and make a 
profit on a piece of real estate. And that--again, we are not 
focused on the borrower. We are focused on the insider engaged 
in criminal acts.
    Ms. Waters. I know, but, unfortunately, I haven't seen a 
lot of prosecutions. For years we have been fighting against 
mortgage brokers and maybe bankers or folks who falsify on 
behalf of these unsuspecting people, tell them what to write 
down. They are usually charging them too much money, too many 
fees, and they are the ones who get foreclosed on. But those 
guys never get prosecuted. I mean, I have worked some of these 
cases for 4 to 5 years in my district, and we have a consumer 
division in the District of Attorney's Office, but they just 
can't seem to catch these characters.
    So that is all I would be interested in, is how to get the 
guys who are putting people into homes with false information, 
overcharging them, too many fees, too high interest rates, 
everything, foreclose on them after they flipped the loans, 
sold the loans. We can't even find them. So when you all have 
information about how you catch those, let me know.
    Thank you.
    Chairman Ney. I thank the gentlelady.
    The gentlelady from Pennsylvania.
    Ms. Hart. Mr. Chairman, I believe Mr. Miller has some time 
constraints, so I am going to cede to him.
    Mr. Miller of California. Yes, thank you.
    I have been involved in development for over 30 years, and 
the question was how many of these have you caught--and when I 
first went into business as a young contractor I did a lot of 
HUD work, and the difficulty we have we refer to the MAI 
appraisals as Made As Instructed. And it is very, very simple 
for an individual to buy a $210,000 home, have a connection 
with a broker or an appraiser, and an appraiser will come back 
with an appraisal for $235,000 that might be inflated $25,000.
    But that inflation on your part is very, very, very hard to 
prove. Because an aggressive appraiser can justify most 
anything they want within 10 percent. If they are really 
creative, I have seen it to exceed 10 percent very easily; and 
for you to come back and say they committed fraud is very 
difficult.
    But that is the area that I have a huge concern with. 
Because the minute we start selling properties--as we are 
looking at this real cost of mortgage fraud--you are selling a 
piece of property that is worth $210,000, and it sold for 235. 
Somebody made 25 grand in costs plus--and fees. You take it 
back, and you have lost money on it, and then your cost of 
putting that piece of property back on the market becomes a 
very, very expensive process for the system. When something is 
expensive for the system, it costs everybody involved in the 
system.
    And there is a lot of ways of committing fraud. Putting 
paint back on a house, putting a latex over a lead-based paint 
is a felony, committing a fraud against somebody in the future. 
So, yes, even painting a home can be fraud and leaving somebody 
with a very expensive process in the future.
    I guess my biggest concern in what was said--and I guess, 
maybe I heard it wrong, but why would anybody be allowed to be 
involved in the process being considered an acceptable vendor, 
whether it be an appraiser, broker or builder--if they have 
been found to be guilty of fraud at some point in time, why 
would, at some point in time in the future, would they even be 
reconsidered to be involved in the process? Did I misunderstand 
what was said?
    Mr. Donohue. Well, I will respond in that one of the 
processes in which we--to step back, if we could, to the 
criminal case itself--or to the civil case--we work with the 
FHA and a mortgage review board to look at the sanctions that 
could be moved against these folks involved as quickly as we 
possibly can.
    And I might say we do have an aggressive--the Department 
has been aggressive in addressing these matters. I just--my 
comment was that I think in some of these cases--which I feel 
to be egregious cases--is my feeling is that these folks that 
might have been involved should be removed, if not permanently 
from the industry then substantially so.
    Mr. Miller of California. I think it should be permanently.
    You know, the problem I have with builders is when they 
start saying it is acceptable industry standards there is 
generally something wrong in what they have done. If they have 
to justify their quality of construction by this is the 
accepted industry standards, generally you have found out that 
that is probably a builder nobody wants any involvement with.
    And any type of fraud is bad. I mean, I am shocked that any 
of us up here would say, well, this kind of fraud doesn't 
bother me, that kind of fraud doesn't bother me. There can't be 
degrees of fraud. Fraud is fraud.
    Now if you have an unwitting individual that did something, 
and they didn't know they were doing it, they were not aware, 
that happens. But anyone who commits fraud, represents himself 
to be a brother who doesn't have the wherewithal to make a 
payment just to get in the home is fraud. And when that house 
is foreclosed upon, somebody else is going to have to pick up 
the burden because they are paying the fees. So any fraud in 
the system impacts innocent people who want to be involved in 
the system.
    I remember when I was a young builder, I did HUD work in 
east L.A. I used to go out and bid these HUD prosecutions, and 
I would be awarded a contract. All of a sudden, my partner was 
called in by the director of the HUD in the region saying he 
wanted a third of our profits back in cash upon issuance of the 
contract. Now he didn't call me in. He didn't call anybody but 
my partner. We were young. I said, we are not going to give 
anybody a kickback. We are low bidder. You have to continue to 
give us the contracts.
    Yes, we continued to be a low bidder, but, for some reason, 
there was always something found wrong with the RFP. The award 
we should have received on the contract was put out to bid with 
somebody else, and we were off bidding another job, so--and I 
don't think that is probably as predominant today as it has 
been at some times over the years. But there is all types of 
fraud, whether it be involved in our system or within the 
builder, appraiser or broker system.
    But any time we--and your job is very difficult. I don't 
know how--unless it is something very, very egregious where you 
can go to court and prove fraud--it is very difficult with an 
appraiser, like I said, anywhere within a realm. And if there 
is any association between a broker builder and an appraiser, 
the system will be impacted in a negative fashion through fraud 
that is very difficult to prove. You might suspect individuals 
of having problems, but to prove it is very, very difficult.
    But I think this is an issue that erodes the system, and I 
think it is something that--if we are allowing people who have 
been found guilty of fraud to reenter the system and be 
acceptable, I think maybe we should look at that.
    But thank you for your efforts. I would encourage you. This 
is an area we need to effectively deal with.
    Thank you. I yield back.
    Chairman Ney. Thank you.
    The gentleman from Georgia, Mr. Scott.
    Mr. Scott. Thank you very much, Mr. Chairman.
    Mr. Donohue, in your testimony, you talked about the 158-
count indictment in the Northern District of Georgia concerning 
flipping. Could you give me an update on where we are on that 
case?
    Mr. Donohue. If you don't mind, I am going to have my--I 
was going to have my head of investigation come up here, but he 
just advised me that the case is still open and for that I am 
prevented from getting into specifics at this time.
    Mr. Scott. Okay. Could you give an indication as to why 
Georgia has just catapulted to the front on this issue? What is 
peculiar? What are the circumstances in Georgia that have 
allowed it to get to the head of the class on this?
    Mr. Swecker. You know, the figures that we have are based 
on an intelligence assessment that we have done which relied 
heavily on private industry, such as the Mortgage Asset 
Research Institute.
    I can't tell you why Georgia is in there. It may be just 
volume of transactions--and as we mentioned earlier, within 
that volume, it provides cover for the unscrupulous brokers and 
appraisers and others that are willing to commit fraud. So it 
may just be a function of the volume.
    Mr. Scott. Mr. Swecker, is that right? Swecker?
    Mr. Swecker. Yes.
    Mr. Scott. Concerning the FBI, you mention in your 
testimony that the mortgage fraud in the secondary market is 
often underreported, so the two-level mortgage fraud is largely 
unknown, that the mortgage industry itself does not provide 
estimates on the total industry fraud and that the industry 
provides incomplete and inconsistent data. And yet you say 
mortgage fraud is pervasive and growing and that, for the past 
18 months, you all have been doing an internal valuation of the 
FBI in terms of your effectiveness. Could you tell me what you 
are finding out in terms of your effectiveness and specifically 
what level of funding is currently allocated to the FBI toward 
mortgage fraud?
    Mr. Swecker. I am not sure about the level of funding. I 
would have to get back to you on that.
    But I can tell you I think our efforts have been very 
successful. We are trying to provide a very visible deterrent 
along with HUD and other investigative agencies. We are trying 
to get the word out there that these schemes are out there. If 
you get caught, you are going to go to jail, and we are hoping 
that we will have some deterrent effect.
    We have been very aggressive with undercover operations. 
This started about two to two and a half years ago--and at that 
time I was the agent in charge in North Carolina. We saw an 
immediate spike as the interest rates went down in mortgage 
fraud schemes.
    As I mentioned earlier, I think there is a lot of cover 
provided in just the volume, and it is a very competitive 
industry. The mortgage broker industry, loan originations are 
very lucrative. I think in all of that volume we have just seen 
some unscrupulous people set up brokerages that are devoted, in 
some cases, almost exclusively to fraudulent schemes, and then 
they disappear after the house of cards starts to come down.
    But the reason we came out with our press statement about 2 
weeks ago, we wanted to get some education out to the industry 
and public. We wanted to develop some awareness and provide 
some deterrent to see if we could get this problem--talk this 
problem down in a sense.
    We have created a mortgage fraud initiative nationwide, 
where we have all of our field offices looking for this type of 
fraud, not individual borrowers, unwitting folks who have been 
caught up in a scheme, but more the systemic fraud schemes 
where we have 100, 200, 300 frauds being perpetrated by one 
company.
    Mr. Scott. What can we in Congress do to help the FBI 
expand these investigations?
    Mr. Swecker. What I mentioned about reporting requirements, 
if we could extend the reporting requirements to the entire 
mortgage industry, not just the banking institutions 
themselves. There are a lot of other types of mortgage-related 
businesses. If they were required to report and if you were to 
give them the safe harbor provision, then we would be able to 
identify these schemes and address them.
    Mr. Scott. Thank you.
    I yield back the balance of my time, Mr. Chair.
    Chairman Ney. I thank the gentleman.
    The gentleman from Arizona.
    Mr. Renzi. Thank you, Mr. Chairman.
    I have a little favor to ask, Mr. Weicher, and I apologize. 
It is not so much fraud related.
    You made a statement that your organization did a hell of a 
job recently to reacting to an issue in Arizona. Myself and 
Congressman Shadegg sent your department a letter. We have got 
one of these down-state assistant providers in Arizona called 
Family Housing Resources. They were removed from the Web site, 
removed from a list of assistant providers.
    When you get back--I haven't seen you in so long--if you 
get a chance could you go down in your Department and reach 
down and grab this issue and see if we can resolve and get 
these guys back in shape? We have got 2,100 Arizonans who 
benefited these--award-winning people, nothing to do with 
fraud.
    But it is good to see you here, and I thank you for the 
work.
    Mr. Weicher. I thank you, Mr. Renzi. We will be getting 
back to you on this, we expect, next week. We are aware of the 
issue. I will go back and have appropriate conversations, but 
we are expecting to be able to get it--to deal with it by next 
week.
    Chairman Ney. The gentlelady from Indiana.
    Ms. Carson. Thank you very much, the three of you, for 
being here.
    I am Julia Carson from Indianapolis, Indiana. You had 
mentioned that you are doing some work out in the Midwest, and 
I would also think that would be Indianapolis.
    Indianapolis had one of the highest rates, if not the 
highest rates, of predatory lending and foreclosures in the 
whole Nation. I am sure you are aware of that. We have had 
extensive town hall meetings to try to pinpoint the problem. 
There is no one particular entity that seems to be the problem. 
You have got real estate agents, you have got mortgage brokers, 
you have appraisers who seemingly have been engaged in this 
whole fraud issue. Inflated appraisal prices, humongous 
foreclosure rates, predatory lending against everybody, not 
just senior citizens or those who are of a low income.
    They will use techniques to inflate the prices, get some of 
the money from the bank, pay off the home buyer, and then the 
home buyer is stuck with repaying that money plus others.
    I was wondering if somebody could tell me if it is 
appropriate, it may not be, what your opinion is on this free 
payment, home down payment for home buyers, and if you have had 
any experience with this group called Nehemiah. They seemed to 
have worked extensively in my district. If you cannot answer, I 
respect that, because that is a policy question.
    Mr. Weicher. Ms. Carson, we permit down payment assistance 
in the FHA program, and Nehemiah is one of the nonprofit 
entities which provides down payment assistance. We have been 
reviewing, and the Office of Inspector General earlier working 
with us have been reviewing, the experience that we are having 
with the loans that have down payment assistance, and have been 
conducting an investigation and analysis really of our loan 
experience with down payment assistance.
    Ms. Carson. Have you investigated Nehemiah specifically?
    Mr. Weicher. I think ``investigation'' is the wrong word. I 
misspoke. We analyze our experience with the loans, what the 
default rates are, comparative default rates, with loans that 
do not have down payment assistance to see if there are changes 
that would be appropriate to make in the program.
    Ms. Carson. I have long held the view, I am in the minority 
with this view, but that not everybody should be a homeowner.
    Number two, we created a help line that got over 800 calls 
initially. It is called 1-800-722-HELP, and that is when people 
are about to sign their name on a paper buying a home, nobody 
reads that fine print up and down the line, that tiny writing 
for the most part. If you have 2 or 3 weeks to read it, that is 
different. So we have volunteers funded by Fannie Mae where the 
credit bureaus are checking out applications before people sign 
their name to a long-term commitment in terms of buying houses, 
and it has worked extremely well. As a matter of fact, we have 
to see if we can get more staff to handle those inquiries prior 
to the time people sign their names.
    In this whole mortgage field, predatory lending, it is not 
isolated. It is not one group or the other. I guess you call it 
the buddy program, they are all involved in this mess together. 
I would hope you would do something that is high profile, that 
would discourage future events, but I don't know how that would 
work. People rob banks every day. Robbing banks is high 
profile, but they still rob banks. Maybe with your creative 
collective minds you can come with up something, because 
consumers are being injured immensely by all of this.
    Mr. Donohue. Congresswoman Carson, I have been advised the 
OIG did an audit of Nehemiah for 2 years, and we can get you a 
copy of that.
    Ms. Carson. I would appreciate that.
    Mr. Swecker. I would like to quickly address this issue, 
the borrowers are often the victims. That is exactly the type 
of violation we are looking for is a scheme that affects 
multiple loans. What you are describing is an area where the 
FBI would apply some resources to investigate. We are aware of 
Nehemiah. There are several field offices that have received 
information about some of the things that they have been 
involved in. I could not discuss what we are doing with it 
because it is ongoing, but we are aware of the group.
    Mr. Miller of California. Would the gentlewoman yield?
    I have been involved with quite a few nonprofits, and HUD 
stays on top of them. I am not speaking to Nehemiah, but I have 
known many others who have come in with questions and concerns 
on how HUD really has diligent oversight. HUD watches the 
resales. They watch those. If there is discrepancies, they 
watch those.
    Ms. Carson. But you take a name like Nehemiah, anybody that 
goes to church is going to trust Nehemiah. You know what I am 
saying.
    Mr. Miller of California. I have heard about some 
companies, they get involved with an appraiser, a broker and a 
builder. When that happens, that, to my previous comment, makes 
it very difficult; but how do you prove there has not been an 
inflation of $25,000 in an appraisal? That comes over to 
nonprofits also.
    Mr. Ney. Thank you.
    Ms. Velazquez.
    Ms. Velazquez. Mr. Swecker, one of the difficult things 
about tracking unscrupulous individuals engaging in mortgage 
fraud is they move from company to company and their histories 
on loans to new employers, and they begin to take advantage of 
families again. The creation of a national database has been 
raised as a way to curb fraud and protect unsuspecting 
families. Can you comment on this suggestion and the possible 
pros and cons of such a database?
    Mr. Swecker. I think that plays into the reporting 
requirement.
    Ms. Velazquez. I am so cautious when it comes to the 
Federal Government and a database.
    Mr. Swecker. That would be the best mechanism, or some type 
of fraud reporting center. We would love to have the 
information. We could do a lot with it. We use a lot of 
computer analysis right now with the existing SAR process, and 
we are getting a lot of case initiations off that.
    The debarment process is something that HUD and some of the 
regulatory agencies are involved in, and I would defer that 
question to Mr. Donohue.
    Mr. Donohue. It needs to be said that by a fact regulation, 
when the FBI comes upon an investigation involving FHA fraud, 
they advise us. We in turn, involving commercial fraud, advise 
them. It is a statement to the cooperation.
    Finally, organizations like the MBA and so on have been 
very active lately in passing on information to us with regard 
to wrongdoers. The communication link is there and getting 
better as we go along.
    We look at these debarments and suspensions activities 
rather well. There is an awful lot of discussion going on as to 
try and see if we can make sure these names are provided for. 
We at HUD are pretty pleased with getting heads up with regard 
to folks that go back in. I feel we cannot do enough in 
ensuring, as the Congresswoman said, staying on top of these 
things and making sure the same people do not come back in.
    Ms. Velazquez. Thank you.
    Mr. Weicher.
    Mr. Weicher. We are in the process of developing a rule now 
for FHA programs establishing a loan officer registry which 
will increase our ability to monitor the performance of loan 
originators. It will help us track loan officers, unscrupulous 
loan officers, as they move from company to company. That is in 
the development stage. It is not yet a proposed rule, but we 
are working on it, and we think it will be useful.
    Ms. Velazquez. Mr. Weicher, the foreclosure rate of 11.68 
percent on FHA loans exceeds the national foreclosure rate by 
7.35 percent. This figure is alarming, and HUD needs to do more 
to protect families from unscrupulous lenders abusing this 
program. We will hear later from Ms. Amiri from the Foreclosure 
Prevention Program of South Brooklyn Legal Services, who serves 
families in my district. There are several interesting 
suggestions in her testimony that I want to hear your thoughts 
on.
    First, can you comment on her recommendation that HUD 
should commission an independent appraisal or appraisal review 
for every transaction to ensure the accuracy of the market 
value of the property and to prevent fraudulent appraisal?
    Mr. Weicher. Ms. Velazquez, I think if we were to 
commission a separate appraisal beyond the appraisal that is 
required as part of the loan application, we would be spending 
a great deal of time and funds.
    Ms. Velazquez. And we would be saving a lot of families' 
homes, too.
    Mr. Weicher. We have established a system whereby we track 
the performance of the appraisers who do business with us. We 
know the name of every appraiser on every loan. There are 
25,000 appraisers who have the authority to write appraisals on 
FHA loans. We track the performance of the loans on which they 
have done appraisals. We look at the early default rates on 
those loans, because if there is something wrong at the front 
end, if there is something wrong in terms of predatory lending 
or a corrupt appraisal, it is very likely to show up in the 
first year or two after the loan has been performed. We look at 
the performance of each appraiser over the first year or two on 
the business they are doing, and if their performance is out of 
line with the normal default rate in their area, we sanction 
them. We throw them out of the program.
    In the 3 years we have been doing this, we have removed 
over 300 appraisers from FHA's program. That is a little over 1 
percent of all of the appraisers who do business with us, but 
we have the attention of the appraisal industry. I hear often 
from appraisers and from appraisal organizations about the way 
that Appraiser Watch is working.
    Ms. Velazquez. I can see that when you have 11 percent on 
FHA loans that exceeds the national rate.
    Mr. Weicher. That is the 30-day delinquency rate.
    Ms. Velazquez. She also suggests that HUD should extend the 
prohibition on resale from 90 days to 6 months. What are your 
thoughts about that?
    Mr. Weicher. This is the antiflipping rule that I mentioned 
whereby we will not insure a mortgage if the home has been sold 
twice within 90 days, and if the period between sales is 
between 3 months and 9 months.
    Mr. Ney. I have to get the other two Members in before the 
vote. Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman.
    I thank the witnesses for being here. They probably think 
they walked into a combat zone. They came expecting to be 
patted on the back and applauded for what they are doing. 
Actually they do need to be applauded for what they are doing 
because this is an important part of what is going on in the 
industry. Unfortunately, you walked into a committee that 
recognizes the magnitude of the problem that you are dealing 
with, which is, in effect, efforts to defraud lenders pales in 
magnitude when you look at its volume compared to the extent of 
predatory lending.
    This is protecting lenders from people who are defrauding 
lenders primarily, which is what you are talking about. But on 
the other side is a category of predatory lending that is of 
enormous magnitude, and that is what this committee has focused 
a lot of its attention on. Part of that goes to, just to 
illustrate the point that I am making, the definition of 
industry insiders that is set out on page 3 of Mr. Swecker's 
testimony. It does not include, except tangentially, I guess 
you could say, other mortgage professionals engaged in the 
mortgage industry.
    So essentially what you all are doing is protecting lenders 
from unscrupulous people, which is an extremely important part 
of protecting the integrity of the system. But when you talk 
about seven plea agreements on page 6 of your testimony, Mr. 
Swecker, and we see probably seven predatory loans being made 
in an hour in that same Charlotte market that you have 
described, and what you walked into is not a reflection on the 
value of what you are doing, it is a reflection on the 
magnitude of our concern about what is going on on the lender 
side where people are being charged higher interest rates than 
they should be charged, where lenders are flipping the loans to 
get more origination fees and what have you.
    I don't want you to go away from here discouraged, I am 
just trying to put this in perspective for you. There is a 
much, much greater in magnitude problem on the lender side than 
the one that you have identified here. I am trying to put that 
in perspective for you.
    Second, I want to just make clear that nobody goes away 
thinking that all Nehemiah organizations are terrible people. 
Nehemiah organizations are all over the United States, and I 
suspect the quality of what they are doing varies from locale 
to locale. The Nehemiah organization in my congressional 
district, for example, I think, has done some commendable work. 
And I don't know what is going on in Indianapolis with 
Nehemiah, but I do not want folks to leave here thinking we 
have indicted the whole Nehemiah organization.
    I don't really have any questions. I think the work you are 
doing is commendable. It is necessary. I would like to see an 
equivalent fraud unit focusing its attention on predatory 
loans, which are not by definition fraudulent loans. There is a 
whole different standard apparently.
    With that I yield back.
    Mr. Ney. Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman.
    Mr. Weicher, Mr. Miller made an interesting point earlier 
that wrongdoing is wrongdoing, and he did not like this 
distinction that some Members were drawing between fraud aimed 
at borrowers and fraud aimed at lenders. His point was 
wrongdoing is wrongdoing. Let me follow that to its logical 
conclusion.
    We have considered and are considering on the floor this 
week a bill that would name companies in this country that do 
business with terrorists or who do business or financing with 
organizations connected to terrorists. We also in this country 
have a practice of naming companies who trade with sanctioned 
nations like Libya or Iran or Iraq. We are going to publish a 
list, I believe, next week of companies who have traded with 
sanctioned nations.
    Under Mr. Miller's premise that wrongdoing is wrongdoing, 
how do you feel about the idea of HUD publishing a list of 
companies that regularly engage in predatory lending?
    Mr. Weicher. We do that now. We publish in the Federal 
Register the names of the entities who we sanction through the 
Mortgagee Review Board, which I chair at HUD, and which 
consists of six assistant secretaries and the director of the 
enforcement center. We review cases of predatory lending, of 
carelessness, of failure to follow our rules.
    Mr. Davis. Do you just name people that you sanction, or do 
you try to quantify people who regularly engage in the 
practice, because they are two different things?
    Mr. Weicher. We name the people that we sanction. We name 
the penalty that is being imposed at the same time. Some of 
those are civil money penalties, and the dollars relate to the 
severity of the violations. And we suspend or debar for 3 
years, 5 years, or indefinitely the most egregious offenders, 
and we publish that information as well.
    Mr. Davis. Mr. Swecker, I spent 4 years as an assistant 
U.S. Attorney in Alabama, and certainly admire the work that 
the Bureau does in this area. When I was with the U.S. 
Attorney's Office, we regularly worked with our State attorney 
general and regularly worked with State agencies to combat all 
kinds of crime in the white collar and violent crime areas. Is 
it helpful to the FBI if State agencies and State attorneys 
general are themselves allowed to regulate and get involved in 
the area of mortgage fraud and predatory lending?
    Mr. Swecker. Yes.
    Mr. Davis. As you know, one of the controversies that we 
regularly have in this body are the degree to which States are 
to be given an opportunity to regulate in this area, the degree 
to which States have an opportunity to be a laboratory and to 
police unfair predatory lending practices. Would you agree it 
is helpful to law enforcement if States have an opportunity to 
have a robust structure in this area to look for violations?
    Mr. Swecker. Absolutely.
    Mr. Davis. Thank you.
    Mr. Chairman, since this is the last hearing of the year, 
as a new member, let me thank you for your leadership and for 
your example in the 108th Congress.
    Mr. Ney. Thank you. And I thank you for your constant 
attendance at the hearings.
    We will dismiss the first panel, and recess for the votes 
on the floor. We will convene the second panel after this 
break.
    [Recess.]
    Mr. Ney. I want to thank the panel for your indulgence. I 
was also waiting to see if another Member would show up. I will 
go ahead and begin hearing the opening statements. We 
appreciate you being with us today.
    On panel two we have Mr. William Matthews, vice president 
and general manager, Mortgage Asset Research Institute, Reston, 
Virginia; Ms. Marta T. McCall, senior vice president, risk 
management, American Mortgage Network, on behalf of the 
Mortgage Bankers Association; Mr. Arthur J. Prieston, chairman, 
The Prieston Group, San Rafael, California; Ms. Brigitte Amiri, 
staff attorney, South Brooklyn Legal Services, Brooklyn, New 
York; and Ms. Ecima Trujillo, national field director of ACORN 
Housing Corporation, Los Angeles, California.
    We will start with Mr. Matthews.

   STATEMENT OF WILLIAM MATTHEWS, VICE PRESIDENT AND GENERAL 
   MANAGER, MORTGAGE ASSET RESEARCH INSTITUTE, INC., RESTON, 
                            VIRGINIA

    Mr. Matthews. Chairman Ney and Ranking Member Waters and 
members of the subcommittee, I am pleased to be here today to 
talk about mortgage fraud. The Mortgage Asset Research 
Institute, also known as MARI, builds and maintains cooperative 
databases in the mortgage industry and is used by financial 
institutions to screen new business relationships.
    MARI was founded in 1990 and was acquired by ChoicePoint 
Services in June of 2003. One of MARI's cooperative databases 
is called the Mortgage Industry Data Exchange, or MIDEX. This 
database was established on the premise that unethical and 
illegal activities in the residential mortgage industry could 
be significantly reduced through the responsible exchange of 
information on mortgage lenders, investors and insurers.
    The MIDEX database is cooperative in nature and contains 
different types of information. First of all, it has nonpublic 
incidents of alleged fraud or material misrepresentation and 
serious misconduct by mortgage industry professionals and 
companies. These incidents are contributed by members of the 
cooperative database and include over 400 lenders, mortgage 
insurance companies and mortgage investors.
    The second type of data we have is public sanctions and 
legal actions. These are collected from over 200 Federal and 
State regulators in the mortgage, securities, commercial 
banking, real estate and appraisal industries.
    The third type of data more positive in nature, is State 
and Federal licensure data on mortgage companies and 
professionals.
    Today, thousands of companies and professionals are 
searched each day through MARI's MIDEX database by its 
subscribers to screen prospective and existing business 
relationships in order not to do business with unscrupulous 
individuals and companies.
    The topic today is mortgage fraud, and a basic definition 
of mortgage fraud is when a consumer or professional 
intentionally causes the financial entity to either fund, 
purchase or insure a mortgage loan when the entity would not 
have otherwise done so if it had possessed the correct 
information.
    We have heard by other testimony in the first panel that 
there are different types of fraud, and people defined it as 
fraud for property and fraud for profit. I would expand that to 
say there is consumer fraud, fraud for property. There are also 
two types of fraud for profit. One is commission fraud. This is 
where one or more industry professionals misrepresent 
information in a loan transaction in order to receive a 
commission. Commission fraud is a more common practice in the 
industry and is a concern to mortgage lenders. It can result in 
harm not only to consumers but to lenders as well.
    The third type of mortgage fraud is fraud for profit and 
consists of systematic collision by industry professionals to 
steal a significant amount of funds from mortgage companies. 
This type of fraud usually involves multiple properties and 
parties in various disciplines within the mortgage industry, 
such as: mortgage originators, appraisers, real estate agents, 
closing agents, builders and title companies. Fraud for profit 
usually results in significant, if not catastrophic, losses to 
financial entities.
    Let me give a quick example of mortgage fraud that we see 
in our MIDEX database. It typifies some of the problems that 
people are having in the industry. In 1997, the National 
Association of Securities Dealers (NASD) debarred and 
sanctioned an individual for taking investor funds of $10,000 
and converting those to his own personal use. Since this 
individual could no longer be a stockbroker. He became a loan 
officer with a national lender. At the same time he set up his 
own mortgage company, unbeknownst to his employer.
    It turned out that the employer examined over 500 loans 
originated by this individual, 20 percent of which had inflated 
appraisals resulting in losses to the financial institution of 
approximately $2.5 million. In August 2002, this individual 
pled guilty to wire fraud and received a sentence of 5 years 
probation and no jail time.
    This incident illustrates the need for proper hiring 
procedures in the mortgage industry and a central repository to 
track professionals who are found guilty of fraud or unethical 
behavior in the industry.
    Our MIDEX database has a significant amount of information 
in it, and I would like to point out some of the trends that we 
are seeing of alleged fraud or material misrepresentation in 
the mortgage industry. These trends were derived from 
submissions from our subscribers. First of all, during the past 
4 years there has been a shift in the States with the greatest 
problems. Georgia and Nevada have caught up and surpassed 
California and Florida as the States with the highest fraud 
scores. In the past, fraud rates from California and Florida 
have led the Nation by substantial margins. They continue to 
have high fraud scores, but Florida now ranks third, and 
California has slipped to eighth place behind Utah, South 
Carolina, Colorado and Illinois.
    The second trend is early payment default data information 
from a company out of San Francisco called Loan Performance. 
This information indicates that problems in several 
metropolitan areas are consistent with the overall results that 
MARI database subscribers have reported to us. Early payment 
default is defined as a loan that is 90 days or more delinquent 
within the first year of that loan.
    The third trend, the types of problems found in loan files 
such as false verifications of employment, inflated appraisals, 
land flips, et cetera, seems to have been relatively stable 
over the last 4 years.
    I appreciate the opportunity to testify on MARI's behalf 
regarding the impact of mortgage fraud and its impact on the 
mortgage industry. Fraud is a significant problem, and the 
types of fraud are increasing, and the types of fraud that are 
occurring are becoming more severe. Fraud not only causes 
losses to financial institutions--it can devastate 
neighborhoods, and it can also result in higher prices to 
consumers. Thank you.
    Mr. Ney. Thank you, Mr. Matthews.
    [The prepared statement of William Matthews can be found on 
page 63 in the appendix.]
    Mr. Ney. Ms. McCall.

   STATEMENT OF MARTA T. McCALL, SENIOR VICE PRESIDENT, RISK 
 MANAGEMENT, AMERICAN MORTGAGE NETWORK, SAN DIEGO, CALIFORNIA, 
         ON BEHALF OF THE MORTGAGE BANKERS ASSOCIATION

    Ms. McCall. Good morning, Mr. Chairman and subcommittee 
members. As stated earlier, my name is Marta McCall, and I am 
the senior vice president for risk management at American 
Mortgage Network in San Diego, California, a wholesale lender 
that deals nationally. I am here today on behalf of the 
Mortgage Bankers Association, and I would like to thank you for 
inviting MBA to testify on the growing problem of fraud 
committed against mortgage lenders and the threat it poses to 
our real estate finance system.
    Addressing fraud is not easy, but MBA believes that the 
industry needs stronger enforcement, better communication, and 
increased innovation if it is to protect the system from the 
costly damage of mortgage fraud. Residential mortgage finance 
in the U.S. has developed from a relatively localized system 
with few participants to one with many specialized 
organizations working interdependently to make the efficient 
and low-cost delivery of home loans possible. Consumers have 
been the primary beneficiaries of this change as more mortgage 
products are reaching more home buyers than ever before.
    Mortgage bankers play a central role in this system 
allowing funds to flow from the capital markets to consumers. 
Lenders underwrite loans, then extend credit on terms and 
conditions appropriate for the level of risk involved. In this 
capacity mortgage bankers bear nearly all of the risk of 
mortgage fraud. Simply defined, mortgage fraud is the giving of 
false information that deceives a lender into extending credit 
beyond the limits of what would normally be extended if the 
true facts were known.
    Lenders, because they advance large sums, can lose 
significant amounts of money. Mortgage fraud costs the industry 
and consumers millions of dollars each year. While no reliable 
numbers are available to measure the extent of mortgage fraud, 
the trend data that is available is troubling. The FBI reports 
a fivefold increase in mortgage fraud investigations from 2001 
through 2004.
    Fraud schemes are as varied as the imagination of those who 
commit them, oftentimes orchestrated by industry insiders who 
know how to exploit the system at the expense of lenders and, 
depending on the type of fraud, at the expense of taxpayers, 
consumers and communities.
    Lenders spend large amounts of money and resources 
attempting to detect and prevent mortgage fraud. Despite these 
efforts, they continue to find themselves victimized by fraud. 
I would like to advance three principles the MBA believes would 
improve lenders' ability to manage the costs of fraud.
    First, investigation and prosecution of mortgage fraud by 
law enforcement agencies needs to increase. Mortgage lenders 
victimized by fraud are more than willing to provide 
information and assist in the investigation of the fraud they 
uncover, but these same lenders get frustrated when cases are 
not prosecuted.
    Secondly, communication between mortgage lenders and the 
State and Federal agencies that investigate and prosecute 
mortgage fraud needs to improve. The current system of mortgage 
fraud reporting is a one-way street. Mortgage lenders report 
fraud, but rarely receive feedback about their reports. I would 
however, like to note that the FBI is working closely with the 
MBA in discussing solutions to this problem.
    Finally, the mortgage industry needs to continue to develop 
better industry tools and improve lender communication to 
combat fraud. We need the help of policymakers in furthering 
these tools and communication.
    I would like to highlight three issues as examples of the 
problems lenders face in this regard. First, many States have 
licensing laws whose purpose in part is to track loan officers, 
brokers and appraisers. Unfortunately, there is a lack of 
uniformity among these State efforts, which can lead to 
loopholes that criminals can exploit by moving from one State 
to another.
    Secondly, communication between mortgage lenders is 
hampered by the fear of lawsuits if one company discloses to 
another the results of its investigations. Some form of safe 
harbor is critical for the type of communication necessary for 
lenders to protect themselves and consumers from fraud.
    Finally, unlike credit and economic risk, the 
responsibility for mortgage fraud is borne fully by mortgage 
lenders. Investors require the repurchase of loans when fraud 
is discovered, but lenders have no practical recourse to those 
who commit fraud as the offenders are either out of business, 
have little capital from which to compensate the lender, or 
cannot be located.
    These are just three examples of the issue that MBA is 
grappling with in helping the industry develop the tools needed 
to protect lenders, taxpayers, consumers and communities from 
the potentially devastating effects of mortgage fraud.
    Thank you for the opportunity to testify here today. The 
mortgage industry looks forward to working with Congress, 
Federal and State agencies in furthering collective efforts to 
combat mortgage fraud.
    Mr. Ney. Thank you.
    [The prepared statement of Marta T. McCall can be found on 
page 72 in the appendix.]
    Mr. Ney. Mr. Prieston.

STATEMENT OF ARTHUR J. PRIESTON, CHAIRMAN, THE PRIESTON GROUP, 
                     SAN RAFAEL, CALIFORNIA

    Mr. Prieston. Good morning, Chairman Ney, Congresswoman 
Waters, and members of the committee. My name is Arthur 
Prieston. I am chairman of The Prieston Group, partner of the 
Mortgage Banking Group of the law firm of Lanahan & Reilly in 
California. I have been involved in the mortgage industry my 
entire professional life, first as an attorney specializing in 
mortgage fraud civil prosecution, and now as a provider of an 
integrated suite of mortgage fraud protection, mitigation and 
indemnification services in the industry.
    Our companies protect hundreds of lenders around the 
country with mortgage prefunding quality control and due 
diligence; fraud detection and prevention training; and ongoing 
education in quality lending and best business practices. 
Through our insurance division, TPG protects against fraud with 
our lender representation and warranty insurance coverage.
    Through our law firm affiliation, we mitigate losses 
associated with mortgage fraud. We have the most experienced 
mortgage banking staff in the country, and they specialize in 
loss mitigation, fraud investigation and recovery analysis.
    In the past 2 years the combined resources of The Prieston 
Group are protecting over $50 billion in residential loans, and 
have resolved and/or paid in excess of $40 million in losses 
due to mortgage fraud on behalf of our clients, making TPG the 
largest mortgage fraud service provider in the Nation. We are 
in the trenches. The pervasiveness of mortgage fraud and its 
increasing impact on our industry is a direct consequence of 
the extraordinary speed of growth and demand on the real estate 
financing delivery system that is both complex and faceless.
    At the same time, the remedies available to address these 
attacks on lenders and borrowers by sophisticated mortgage 
fraudsters are antiquated and ineffectual. Complex mortgage 
fraud schemes, the most damaging, are necessarily dependent on 
third parties to the transaction. It is these parties, such as 
appraisers and settlement agents, among others, who can, if 
held accountable, prevent mortgage fraud, but in many cases 
have no liability for losses due to mortgage fraud.
    The extent of mortgage fraud--and we have talked about 
statistics throughout some of the testimony heard today, 
discussing numbers such as 10 percent of all loan applications 
is commonly quoted and accepted as fact, but the truth of the 
matter is the industry has been unable to unequivocally 
substantiate that statistic. The extent of fraud varies 
depending on geographic location, origination channel of the 
loan, the lender's commitment to quality originations, and the 
accountability of all participants in the transaction.
    Historically we know that a high propensity of fraud occurs 
in urban markets. The more notable markets at the current time 
include Chicago, Cleveland, Atlanta, Salt Lake City, Brooklyn 
and Detroit, to name just a few.
    Mortgage fraud is not only here to stay, its incidence is 
becoming more widespread. Within the experience of The Prieston 
Group, our insurance and legal claims have risen over 40 
percent in the last year. We believe this is attributable to an 
increased awareness of successful methods and techniques to 
commit fraud. Left unabated, we believe mortgage fraud will 
continue to grow, and despite comments earlier that it may 
decrease as the market decreases, we do not believe that to be 
the fact.
    Victims of mortgage fraud--and we understand that the title 
of today's committee meeting is based upon the effect on 
lenders--is primarily on the borrower. Mortgage fraud affects 
all those who are involved directly and indirectly with the 
loan transaction. Borrowers, of course, in many instances are 
the primary victims. In many for-profit schemes, borrowers are 
duped into providing financial data, identity, or in many 
circumstances falsely advised as to the insignificance of 
fraud, and lenders are not affected so long as payments are 
made. We know that is not true. Lenders are affected 
significantly and sometimes resulting in closure of the 
business.
    Our firm has represented over 100 small businesses or 
family-operated businesses employing tens of thousands of 
people who have been driven to the brink of business failure as 
a result of having to repurchase fraudulent loans.
    We discussed earlier predatory lending versus mortgage 
fraud and whether or not it is one and the same. We believe 
predatory lending is a significant problem in the country and 
needs to be resolved. Mortgage fraud in its current industry 
context does not include predatory lending per se, but rather 
relates more specifically to the types of fraud perpetrated on 
lenders and borrowers alike.
    Predatory lending legislation is intended to address the 
scam artists who rip off unsuspecting borrowers with abusively 
high-cost loans. In many instances, such loans fall into the 
subprime credit classification for no reason other than the 
interest rate associated with that loan. Notwithstanding the 
definitional confusion associated with predatory lending and 
the types of lending practices it is intended to prevent, 
mortgage fraud affects all loans alike, both prime and 
subprime, and borrowers alike regardless of their credit.
    Can predatory lending practices be considered acts of 
mortgage fraud? Absolutely, but most statutes do not directly 
address, prevent or provide remedies for the types of fraud, 
such as flipping, occupancy, application and appraisal, that 
are the most prevalent.
    Most lenders maintain rigorous standards for preventing 
fraud through automated detection systems, hands-on 
reverification of financial data, and rereviewing of property 
values. They pursue claims against all participants in the 
fraud, both criminal and civil.
    Although we support recent actions by the FBI and the 
Department of Justice to promote the prosecution and deterrence 
of mortgage fraud perpetration, there is no better tool to 
prevent such actions than by hitting all of those contributing 
to the transaction where it hurts the most, in their wallets 
and in their pocketbooks.
    Many of these fraudulent residential mortgage loan 
transactions, but for the participation of third parties such 
as appraisers and settlement agents, the fraud would never have 
succeeded. They are the gatekeepers. However, as a result of 
current laws in various States, these particular parties are 
immune from liability.
    In a typical fact pattern, the original appraisal is 
ordered by the mortgage broker. Upon completion of the 
appraisal, it is submitted to the lender by the mortgage 
broker, and submission of the appraisal report to the lender is 
standard. However, if, in fact, that appraiser has been 
negligent, grossly negligent, or fraudulently misrepresented 
the appraisal, the lender cannot bring their action in many 
States against that appraiser to recover. California and Texas 
and a few other States have adopted the Restatement 2nd of law 
in order to do so.
    Finally, settlement agents. In many instances, settlement 
agents are acutely aware of when a flip transaction is about to 
occur. This is the result of their knowledge of contemporaneous 
transactions, coupled with their knowledge of a contract of 
sale indicating extraordinary increases. They are aware of 
sources of down payments, that the alleged borrower does not 
exist. Settlement agents are the linchpin to the fraud 
transaction. However, to date there are no flip statutes in the 
conventional lending industry firmly requiring the agent to 
disclose their knowledge or suspicion of the flip to the 
lender.
    In conclusion, I hope members of the committee understand 
mortgage fraud is a serious problem in the economic lives of 
all Americans. Mortgage fraud is so devastating because it is 
so insidious. People often do not know when it has victimized 
them until it is too late. The fact is mortgage fraud carries a 
financial penalty that reverberates throughout our economy. We 
all end up paying the price for mortgage fraud one way or the 
other, either directly or through higher fees or insurance 
costs or other hidden taxes. Mortgage fraud is most assuredly 
not a victimless crime, and I support the actions of the 
committee that has recognized mortgage fraud for the dangerous 
blight that is, and hope that we do everything we can through 
legislation, enforcement and prevention to eradicate it.
    On behalf of myself and The Prieston Group and the mortgage 
banking industry, I thank you for your time and attention.
    Mr. Ney. Thank you.
    [The prepared statement of Arthur J. Prieston can be found 
on page 79 in the appendix.]
    Mr. Ney. Ms. Amiri.

  STATEMENT OF BRIGITTE AMIRI, STAFF ATTORNEY, SOUTH BROOKLYN 
               LEGAL SERVICES, BROOKLYN, NEW YORK

    Ms. Amiri. Mr. Chairman and members of the subcommittee, 
thank you very much providing me with an opportunity to testify 
today regarding mortgage fraud and predatory lending.
    I am a staff attorney at South Brooklyn Legal Services, and 
I am a member of the National Association of Consumer 
Advocates. I represent low-income homeowners who have become 
the victim of predatory lending and have fallen into 
foreclosure or are on the verge of foreclosure.
    We are inundated with hundreds of homeowners each year who 
seek our assistance because they are on the verge of losing 
their homes. We receive referrals from all over New York City, 
from churches, communities groups, the courts, elected 
officials and government agencies. In recent years we have been 
overwhelmed with requests for assistance from families who have 
been the victims of property flipping. Most of these homeowners 
are young working families, often single mothers who are 
raising children alone, and are African American, Latino or 
West Indian.
    Because property flipping has a devastating impact on low- 
to moderate-income, first-time home buyers and low-income 
communities throughout the country, it is these families and 
the communities in which they live that are the true victims of 
the mortgage fraud, which is the subject of the hearing today. 
I have had conversations with attorneys all over the country, 
and they have all told me the same thing: Property flipping is 
devastating to families and their neighborhoods from rural 
Oklahoma to urban areas such as Chicago. We must address this 
problem as a national problem.
    The property flipping scams we see almost always involve a 
one-stop shop. They target first-time home buyers who are 
unsuspecting and promise them they will take care of all 
aspects of the home-buying process.
    The scheme is enormously profitable. The business model is 
simple. We have discussed property flipping before, but 
basically the one-stop shop purchases the house cheaply, makes 
cosmetic repairs, works with a lender and appraiser to 
fraudulently overappraise the house, and then induces an 
inexperienced and unsophisticated home buyer to purchase the 
property. Families who have fallen prey to these companies will 
inevitably describe how much they trusted the salespeople who 
were employed by these one-stop shops, who repeatedly assured 
them they were in good hands, but at the same time were using 
high-pressure sales tactics. Families are often enticed by 
advertising slogans such as, ``Why rent when you can own,'' 
because they have spent their entire lives living in rented 
apartments, and they seek the American dream of homeownership.
    The fraudulent overappraisal is the key to the scheme. The 
flipped properties are often overappraised by tens of 
thousands, if not hundreds of thousands, of dollars by 
appraisers colluding with the one-stop shop and the originating 
lenders.
    One-stop shops generally work with one or a few originating 
lenders that cooperate in the scheme, and the scheme is 
successful because the originating lenders are willing to make 
the loans based upon the bogus appraisals, but then turn around 
quickly and sell them into the secondary market.
    The home-buying process is complicated, but the one-stop 
shop makes it sound easy by promising to take care of all of 
the details. By providing all of the real estate professionals 
for the transaction and by gaining the trust of the families, 
the one-stop shop completely isolates the families and prevents 
them from seeking outside assistance or help. The families are 
often kept in the dark because they often do not see the 
documents relating to the purchase and financing of the home 
until the actual closing. And at the closing table, they are 
pressured into signing these documents they do not understand. 
The attorney that is brought to the closing does not explain 
anything to them because the attorney actually works for the 
one-stop shop. Any protestations by the homeowner are usually 
met with assurances from the one-stop shop that they can afford 
the loan by the rental income, or threats that the buyer will 
lose her down payment if she walks away.
    The monthly mortgage payments are often unaffordable 
because the properties do not produce the rental income and 
also because the lender or one-stop shop falsified income on 
the mortgage application to make the deal go through.
    The property flipping cases that we saw several years ago 
when this scheme became prevalent exclusively involved loans 
that were insured by HUD's FHA program, and in these cases, the 
originating lenders and the lenders that purchased the loans on 
the secondary mortgage market did not risk financial loss 
because they were guaranteed a full return on the loan through 
the FHA insurance. Indeed, either the family would stay 
current, or they would default, and the house would be sold at 
foreclosure, and the lender would recoup all of its losses.
    But my office recently started seeing a number of property 
flipping cases involving conventional mortgages where the 
originating lender worked in concert with the one-stop shop to 
inflate the value of the property, and then immediately sold 
the mortgage into the secondary market to obtain a full return, 
or even a premium, on the loan.
    Most loans today are immediately sold into the secondary 
market. In the property flipping cases that we have seen, this 
means that the originating lender will not even hold onto the 
loan for even a day before it is sold into the secondary market 
and it escapes financial risk and sometimes liability.
    If the secondary mortgage market, lenders and companies 
that buy these loans, conducted proper due diligence, spotted 
the red flags and refused to purchase these loans, the 
originating lenders would not have the ability to make these 
loans.
    Just briefly I would like to tell you about Ms. W, who 
represents the type of clients we represent. She is African 
American, 68 years old, a retired school aide living on Social 
Security. She sought to purchase her first home after being 
priced out of her long-term apartment. After seeing an 
advertisement for a one-stop shop, she made an appointment to 
look at homes. She gave the one-stop shop $20,000, her entire 
lifesavings, as a down payment. What she did not know was the 
property she was purchasing had been flipped. It had been 
bought by the one-stop shop only 3 months previously and marked 
up $169,000. She was also unaware that it was intentionally and 
fraudulently overappraised by almost $150,000. She also did not 
know that the attorney that the one-stop shop arranged to 
represent her actually worked for the one-stop shop. When she 
showed signs of wanting to back out of the deal, they 
threatened to keep her down payment.
    The loans were unaffordable. The mortgage payments far 
exceeded her income, and when she moved in, she started to 
realize the problems with the transaction. One thing that she 
realized was that the property was not a legal two-family, 
which meant that the rental unit upstairs was illegal, and she 
could not collect the rent income.
    I would like to jump to some of the suggestions that we 
would like to make to try to prevent these types of schemes 
from occurring.
    First, for FHA-insured loans, HUD should commission an 
independent appraisal, appraisal review, or some sort of 
quality control before the loan is made. I understand this will 
take a lot of resources, but even if it started by focusing on 
the hot zones that HUD has already designated as predatory 
lending areas, that would be a good start.
    Second, HUD should extend the current antiflipping 
regulations, which currently prohibit FHA insurance for homes 
bought and sold within 90 days, to prohibit insurance for homes 
bought and sold within 6 months.
    Third, in 2003 HUD proposed and passed a regulation that 
would hold originating lenders liable and accountable for 
appraisals, but they should go one step further with that as 
well.
    Fourth, lenders and companies that purchase conventional 
and FHA-insured loans should conduct appraisal reviews and 
search for red flags prior to purchasing the loans. They should 
keep track of the lenders that make bad loans, underperforming 
loans, and illegal loans, and stop purchasing them from those 
companies.
    Thank you again for this opportunity and your invitation to 
provide testimony today.
    Mr. Ney. Thank you.
    [The prepared statement of Brigitte Amiri can be found on 
page 49 in the appendix.]
    Mr. Ney. Ms. Trujillo.

  STATEMENT OF ECIMA TRUJILLO, NATIONAL FIELD DIRECTOR, ACORN 
          HOUSING CORPORATION, LOS ANGELES, CALIFORNIA

    Ms. Trujillo. Chairman Ney, Congresswoman Waters, and 
members of both subcommittees, thank you for the opportunity to 
address you on the important issue of mortgage fraud. My name 
is Lez Trujillo, and I am the national field director of the 
ACORN Housing Corporation.
    ACORN Housing builds and rehabilitates homes, and it is one 
of the largest providers of housing counseling services in the 
country. ACORN Housing works closely with our sister 
organization, ACORN, the Association of Community Organizations 
for Reform Now.
    Mortgage fraud is a national problem. In recent weeks much 
of the attention has been about how lenders are hurt by this 
form of fraud, but it is more important to look at the people 
who have been taken advantage of all over the country. While it 
hurts the bottom line of financial institutions when they are 
taken advantage of, it devastates the lives of citizens when 
they are victimized by these scams.
    Let me begin by describing a case in Baltimore. In 1998, 
Matilda Watson, a participant in the welfare-to-work program, 
bought a house with American Skycorp. The loan officer 
falsified information on her application to get the loan 
approved, including nonexistent child support payments. Matilda 
thought $54,000 sounded high for the house in that 
neighborhood, but her realtor insisted that an FHA lender would 
not approve a loan if the house was not worth it. When she 
later asked about home inspection, she was assured the lender 
would make sure the house was in good shape.
    As soon as Matilda closed on the loan, she found out the 
house was falling apart. The furnace stopped working, the 
upstairs plumbing leaked into the kitchen, and the lighting was 
faulty.
    Most tragically for Matilda and her family, the Department 
of Social Services deemed the house unfit for her children to 
live in, and they removed her children from the home. American 
Skycorp abused the FHA program to obtain loans on homes with 
inflated values and amid promises of future repairs.
    African-Americans received 77 percent of the company's 
loans. The Maryland Attorney General's Office noted, where the 
consumers default, and the property is foreclosed upon, the 
practice hurts the neighborhood in which the consumer lives.
    When ACORN brought these problems to light, they were sued 
by $10 million by Skycorp for defamation of character. The suit 
was quietly dropped when the Federal Government successfully 
prosecuted the company for the same practices ACORN had accused 
them of.
    Another scam we have come across is the purchase of 
contract for deed, which has been called nothing less than 
modern-day share shopping. Houston ACORN discovered that the 
developer, Jack Markman and his associates, have targeted up to 
800 families in the city in this scam. All of the home buyers 
we talked to monolingual Spanish-speaking immigrants, and they 
signed contracts in English, which they did not understand.
    The main problem with the contract is that residents would 
have to wait 20 to 30 years before they could become owners of 
the house. In many cases, there are no legal descriptions or 
maps with the contract. Most of these loans have high interest 
rates and unjustified tax and insurance payments.
    The insurance appears to have a $5,000 deductible. The 
insurance company offices are based out of the Turks and Caicos 
Islands, and they do not have a license to operate in Texas. 
One home buyer's house burned down not long ago, and she was 
never able to get money from the policy. After intimidating 
families to move out, Markman has sold these houses time and 
time again, making large profits each time.
    Since early 2003, over 140 families have joined ACORN in 
taking a variety of options to address their concerns. The home 
buyers want marketable title to their homes, and to ask for 
local and State protection. There is an incentive to be 
reckless in a market driven by value and securitization--
because too many participants from lenders to brokers to 
appraisers make money up front--and there is an incentive to 
take action to harm borrowers. This is especially apparent in 
the super hot market where business is done with lawyers and 
all the protections.
    Because so much money is made up front in the form of 
points and fees, and in the form of yields and premiums to 
brokers, there is less reason to insure that the loans perform, 
there is also less access to legal resource because of the 
prevalence of mandatory arbitration costs.
    Unfortunately, it is not just fly-by-night operators who 
have been involved in these scams. Even a larger lender like 
Wells Fargo was recently accused of pressuring appraisers to 
justify large loans. We have found that this practice has 
targeted the most-vulnerable consumers, including low income 
people, the elderly, and immigrants. These vulnerable home 
buyers are more likely to be in the subprime market, and are in 
effect, punished twice. They pay more for the risk, and then if 
things go wrong, they face the consequences.
    We need both national protections against predatory 
practices in a State and local action. The States need to be 
able to respond quickly to the problem. Federal action cannot 
preempt their ability to protect their citizens. This is why we 
oppose the OCC's preemption of the State laws. We also need 
housing counseling to insure that borrowers can spot bad 
lenders, and that borrowers are connected with reputable market 
participants.
    Finally, we need a strong community investment act that 
provides incentives for responsible financial institutions to 
lend under server communities and lower ratings for those that 
participate in predatory practices. The FDIC should not weaken 
this law.
    Mortgage fraud is a complicated and troubling issue. While 
it causes heartache for banks and other lenders as they look at 
their bottom line, it causes far worse anguish for many of the 
families we represent. Their experiences must be a part of the 
debate on how to end mortgage fraud.
    Thank you for the opportunity to address you today. I am 
happy to answer any questions you may have.
    Chairman Ney. Thank you very much.
    [The prepared statement of Ecima Trujillo can be found on 
page 102 in the appendix.]
    Chairman Ney. I wanted to ask Ms. Amiri about the One Stop. 
If you don't have--I understand about problems maybe with One 
Stop and who is running it. If you don't have the One Stop, how 
do you get guidance or counseling to people if you don't have a 
One Stop?
    Ms. Amiri. How would you give guidance and counseling to a 
first-time home buyer?
    Chairman Ney. Yes.
    Ms. Amiri. When we do first-time home buying training 
sessions as well, we tell them what to look out for--always to 
get their own attorney, get their own building inspection and 
get a sense of the conditions of the property prior to----
    Chairman Ney. But you provide legal services, don't you?
    Ms. Amiri. We do. We do.
    Chairman Ney. You provide them free?
    Ms. Amiri. To low income and moderate homeowners. But we 
also train other community advocates. We speak to first-time 
home buying counseling sessions to warn people about what not 
to get into--because obviously it is easier if they don't get 
into a bad loan in the first place rather than come to us after 
they have already gotten into it.
    So we would warn them in lots of different ways about how 
not to get into a bad loan as a first-time home buyer.
    Chairman Ney. Thank you.
    Mr. Matthews, would a national registry work best if it 
covered all loan originators, who would be--if we had a 
national registry, who would be in that?
    Mr. Matthews. I think that one of the issues today is that 
there is not as much accountability in the mortgage industry as 
there should be. And if you look at the history of the 
industry, it has gone from this--a very personalized industry 
affiliated with saving and loan companies to a much more 
depersonalized industry with mortgage brokers.
    I think the answer to your question is that it would 
definitely be appropriate for loan originators--whether it be a 
broker or retail loan officer to be in a national registry. And 
that way you can track not only the company's performance, but 
the individual's performance as he or she goes from company to 
company, or migrates from State to State.
    Chairman Ney. Because I knew there was a case, I was on a 
roundtable one time where somebody had done something--just 
moved to another State. I think, you know, if you look at the 
overall picture, I have had a lot of mortgage brokers and 
bankers come to us and say--and they did in the State of Ohio 
when I was in the legislature and say we want to tighten this 
up--you know, we want to take the fraudulent side out of it--
you know, police their own type of situation, which I think has 
been good--because the vast majority of them are decent people.
    But there has got the to be a way to find the ones that 
aren't and not have them escape State to State. And that is 
maybe why I thought a national registry--pretty comprehensive 
it would have to be though. You can't just have that group in 
or that group in--and I think you have to have that pretty 
comprehensive, I would assume.
    Mr. Matthews. Absolutely. Just recently, Ohio passed laws 
to expand the regulation to loan originators. And if you look 
at the securities industry, what they went through in the 
1970s, the State security agencies banded together to create a 
central repository to track the registration and performance of 
stockbrokers, and so that would be something that I think would 
be appropriate for the mortgage industry as well.
    Chairman Ney. Whoever would like to answer this. On the 
first panel, I asked if it made a difference whether the volume 
of loans, the originations, decreased as it relates to a 
corresponding decrease in mortgage fraud cases. In other words, 
does this only go up exponentially when the loan volume 
increases, the fraud increases, or can you have a loan volume 
decrease and the fraud still continues steady? If anybody 
would----
    Mr. Matthews. I think there are some countercyclical 
aspects of the mortgage industry. As loan volumes decrease, 
mortgage fraud will not necessarily correspondingly decrease. A 
lot of times it will increase. And part of the problem is that 
the industry is commission-based.
    So if I am in a boom time with significant refinances 
because of low interest rates, I am making a significant income 
as a loan broker or a loan originator. As rates rise, and my 
ability to originate loans goes down, my income will go down as 
well. Consequently, loan originations will often push through 
problem loans in a slow market in order to get a commission.
    Chairman Ney. The last question I have if anybody wants to 
answer. Each one of you, I think, has touched upon or mentioned 
appraisals in the system are, or at least a few of you have. 
Wouldn't it behoove a loan originator to have some type of 
random check on appraisals, to have, you know----
    Ms. McCall. I would like to address that.
    Chairman Ney.--idea for my colleagues. I better mention 
that, but we were talking about it. Wouldn't a random check be 
good?
    Ms. McCall. Yes.
    Chairman Ney. To make sure your appraisers are giving you 
the right info.
    Ms. McCall. You are exactly right. We do that. There are 
several things that we do. First of all, many lenders will 
approve appraisers.
    Chairman Ney. Does the industry as a whole do it?
    Ms. McCall. As an industry as a whole, you will either 
approve appraisers or you will use a list of excluded 
appraisers. There are a couple of lists out there that are 
readily available. Unfortunately they are not comprehensive, 
such as the Freddie Mac list or the FHA debarred list.
    Chairman Ney. But beyond that--because I went one time, and 
they said here is a list, and I said I definitely don't want 
that guy, because I knew him, and I definitely didn't want him, 
but he was on the list.
    Ms. McCall. So there are a couple of other things.
    Chairman Ney. But I am saying, even if they are on the 
list, do you go out and--okay, here is your approved list. I 
know you have got that. But do you ever go out and double-check 
an appraisal randomly?
    Like here is Susie Smith on the approved list to be an 
appraiser. She says this house is worth this. Is that ever 
randomly checked?
    Ms. McCall. Yes, it is both done randomly, and it is done 
on an adverse basis. We do it pre-funding and post-funding. 
There are QC requirements that necessitate lenders--all 
lenders--to necessitate QC which includes a component of 
verifying on your 10 percent sample or statistical sample 
actually go out and randomly choose appraisals to reverify.
    We also do it in the pre-funding basis in two areas, one 
when the underwriter actually gets the transaction and looks at 
the appraisal. Many of the underwriters have received training 
to look at the appraisals and question the right things. And in 
those cases, we can use several tools. There are automated 
tools. We can send appraisers out to the property to inspect to 
tell us, yes, we really do think that value is good. And then 
the third kind of thing that we would do on a prefunding basis 
would also be--from a prefunding QC perspective--which is not 
typically part of the origination process, but does occur 
before the loan funds. Obviously that protects us, and it 
protects the consumer from buying a home that is overvalued.
    Chairman Ney. Thank you.
    The gentlelady from California.
    Ms. Waters. Mr. Chairman, I would like to thank all of our 
panelists for participating today and a special thanks to Ms. 
Trujillo with ACORN all the way from California, and of course 
legal services, and those of you who are working really in the 
vineyards with all of the problems that our consumers have and 
particularly our low-income seniors.
    You know, I just went through one of these home-buying 
experiences. It is very difficult, I am sure, for many of our 
low income and middle class working people to negotiate their 
way through the purchase of a home, and nobody is helping them.
    First of all, I was surprised that someone would put a 
stack of papers in front of me and say just sign. Nobody 
explains what they are. Nobody explains the fees. You have to 
ask one by one, what is this fee, what is this for. And then 
you discover there is something called a county transfer fee. 
And you call the county, and they say, we don't have anything 
to do with that. And then if you are lucky, you know, they say, 
well, we will take it off.
    Then I discover that, you know, the real estate people, 
brokers times, the mortgage--well, the real estate salespeople 
are sometimes getting kickbacks on everything. Kickback on the 
hazard insurance policy. You know, people are pushing you, get 
it from this one, get it from that one. Well, what is all of 
this about? People are getting a commission, they call it. I 
call it a kickback. They get a commission on the hazard 
insurance--and, guess what, the appraisals are being marked up. 
And, guess what, the real estate salespeople and others are 
getting a commission on the appraisals. I want to know, why is 
an appraisal for this place 1,500 by this person, another 
person told me they can give it for 750 and another lender 
says, oh, we will give it to you for free.
    So, I guess what I am saying is, while we are talking about 
fraud, and we are talking about the harm to the lender, and we 
are trying to talk about harm to the consumer, that is not 
everybody in this business, I want to tell you.
    The first harm, I am going to tell you, is that most people 
don't know what they are doing and they can't negotiate a 
purchase because it has gotten really implicated and nobody 
really explains. Even if you do sometimes a first-time home 
buyer course, and you try and cover everything that they will 
encounter--first of all, many times, they are not talking to 
anybody face to face. You know they don't like to talk to you 
face to face any more.
    What they like to do is you called the lender, and they put 
you on the telephone to an underwriter or somebody, and they 
fax or e-mail you some papers, and they tell you to sign them 
and send them back and you fax and sign and send them back, and 
fax and sign and send back, and here is this first-time home 
buyer or somebody by themselves trying to do all of this.
    I guess there is no requirement in law that the buyer must 
be walked through the contract, every aspect of it, step by 
step, and there is no requirement of that in law. I am telling 
you, nobody offers you anything. So despite the fact we are 
talking about fraud to the lender and fraud--this whole 
industry needs a real review, Mr. Chairman, a real review. And 
the average consumer needs a way by which to have someone 
review a contract before they enter into it and sign it, 
because there are so many decisions to be made.
    You have--I wish everybody could negotiate their interest 
rates, I mean, but it goes, everything now from 4.7 to 7. And 
don't tell me it is on a different kind of loan, fixed-rate 
mortgage, 30 years. I mean the interest rates, you know, 
differences are this wide. I don't know how people know that 
they can negotiate it or, you know, what to ask for it, but 
this is a very difficult business now. It is very complicated 
and people are left alone to fend for themselves. I am not so 
worried about the lender, I mean, as I am the consumer in all 
of this.
    Lenders may get ripped off, but they have got enough money 
and enough lawyers and enough expertise to protect themselves 
and to go into court and to do a lot of things. But the poor 
consumers don't have much of anything. I appreciate whatever it 
is the government is doing for lenders and for consumers, but 
it is not enough for the consumer, I tell you. It is just not 
enough.
    And, again, I don't know how--you indicated that you 
advised people to go out and get a lawyer. Well, that adds to 
the cost. I mean, most working people and poor people just 
can't pay lawyers fees, you know, I don't know what lawyers 
charge to be involved. I think here in Washington D.C., you are 
required to have a lawyer, but in most places you are not.
    So, while we are looking at this, and this is good that it 
raises a subject. I think, Mr. Chairman, that one of the things 
we might want to consider is a complete review of the home 
buying mortgage process and figure out how we can eliminate 
some of the confusion, the obstacles, and require, you know, 
more information to the consumers at the time of the signing of 
the contract, that people don't just get thrown a bunch of 
papers that they have to sign and told to walk through them, 
each line by line.
    I guess, and let me just say, it may be a good idea to have 
a database. But, Mr. Matthews, did your company have a database 
in Florida?
    Mr. Matthews. A database in----
    Ms. Waters. A database in Florida for felons who were----
    Mr. Matthews. We do have a database, it is nationwide. It 
includes derogatory data such as sanctions taken by regulators.
    Ms. Waters. No, this is on a different subject now. Aren't 
you the guys who developed the database for the identification 
of felons in Florida who were supposedly prevented from voting 
because the law does not allow them to vote? Was it your 
company? ChoicePoint? Was it ChoicePoint?
    Mr. Matthews. I am with Mortgage Asset Research Institute. 
We are a subsidiary of ChoicePoint. I am not familiar with the 
database that you are talking about. I am not sure if 
ChoicePoint developed that or not. That is not in my field of 
expertise.
    Ms. Waters. Well, you better check your parent company, 
because I think your parent company developed a bad database, 
and that database was racked with problems and inconsistencies 
and names, I am not blaming you for it, but if CheckPoint is 
your parent company, maybe you ought to know what that is all 
about. So that when somebody hears that name, you know, the 
ears go up and they think, oh, no, we don't want you to develop 
a database. Check it out and see what they can tell you about 
that.
    Mr. Matthews. I will follow up on that. Thank you.
    Ms. Waters. Yes. Thank you.
    That is all, Mr. Chairman.
    I yield back.
    Chairman Ney. Thank you.
    The gentlelady from California.
    Ms. Lee. Thank you, Mr. Chairman, I want to thank you and 
the ranking member for this very important hearing today. I was 
in a markup, so forgive me if what I ask is redundant.
    First, let me just say it seems like the more we support 
and push for the American dream to become real for ordinary 
Americans, the more scams we are faced with by legitimate 
professionals. It seems like the more--we want to include more 
people in homeownership, an opportunity is grabbed by the pros 
the figure out how to scam them. And I have got to say that, 
because I have many, many constituents who continue to go 
through this.
    Today, I just have a couple of questions on--I am trying to 
get a handle on the definitions between flipping, speculation 
and chunking. I mean, what--what are the lines drawn and what 
is the difference between flipping and speculation and then 
speculation and chunking, or are all of those definitions kind 
of--connote the same practice? Who can answer that? I am not 
sure who to direct the question to.
    Mr. Prieston. Thanks, I will take it, it looks like----
    Ms. Lee. Okay.
    Mr. Prieston.--by default. Primarily the issue of flipping, 
I think is the one--the speculation is not so much a mortgage-
fraud related term as a general term as it relates to real 
estate and properties, misleading the actual, you know, 
appraised value, inflating values on the sale of raw land as 
well as land to be developed. It could very well be that this 
is a fixer-upper, and with a good appraisal that relates to an 
increased value of the property if certain amounts of money 
were put into it. You could speculate on that property--and 
essentially with that fraudulent appraisal, recoup benefits in 
a fraudulent manner. That is essentially speculation.
    The flipping, however, is a little bit more complex. It 
relates to the idea where you purchase a property, many times 
these are HUD properties that require levels of renovation. You 
purchase a property, I would say a value of $15,000. You then 
sell that property for $150,000. And the way to do that is 
essentially to have dual escrows. You have to have an inflated 
appraisal. You have to have a duped borrower or, in fact, a 
straw borrower on the other side of the transaction, that the 
properties are bought and sold simultaneously, and the lenders 
are unaware this is happening because recordings only go back 
so far and it takes a bit of time before these multiple 
transactions actually hit. And then as a result, a gain of 
$135,000 is made instantaneously.
    And in my presentation of my testimony, one of the issues I 
brought up was the fact that a settlement agent is a 
gatekeeper. It is a gatekeeper in that they are privy to all 
the transactions that are going on. Yet, they do not have 
liability, unless of course they are guilty of some level of 
malfeasance. They don't have a liability to communicate what is 
happening in front of everybody else's eyes in that room.
    Ms. Lee. So flipping does not have criminal penalties at 
this time.
    Mr. Prieston. It can. It can have criminal penalties. It 
does give rise to criminal penalties in certain circumstances. 
And some agents--as Agent Swecker said earlier today--and some 
of the larger scams--and some of the larger scams such as in 
Brooklyn, there have been criminal penalties imposed upon 
settlement agents.
    But in the--let us say--less sexier claims where you have, 
say, $2 or $3 million in losses with 30 borrowers involved, the 
settlement acts have gone free. And the lenders who have the 
resources to act on behalf of the borrower and on behalf of 
themselves can't necessarily prosecute that settlement agent in 
varying States throughout our country. Because, again, there 
isn't that duty that arises.
    Chunking basically comes from this idea that you can, you 
know, churn a loan in and out. Brokers like to take their 
commissions rather quickly. They can move a person, a property 
rather quickly. They can make a loan, and then 60 to 90 days 
later, put them in another loan. And they take a piece along 
the way - and it is kind of moving them from one property to 
the next rather quickly, thinking that now they have taken 
advantage of yet another or more beneficial rate--lying to that 
borrower, misrepresenting to that borrower--that, in fact, it 
is a more beneficial program when it is not----
    Ms. Lee. Are there criminal penalties?
    Mr. Prieston. And under the statues that this committee has 
helped promulgate under a rather confusing web of criminal 
penalties such as mail fraud and wire fraud and false 
instruments, yes. But, again, we are here to talk about maybe 
kind of cleaning that up little bit.
    Ms. Lee. Sure. Let me ask Ms. Amiri, with regard to the 
inflated appraisals and independent appraisal review. Are 
there--I mean, there are no national standards now. What do 
States have or do we have that is just a minimal kind of 
requirement for appraisers, because it sounds like there are 
none. It is kind of a free-for-all.
    Ms. Amiri. Well, I can talk about individually with New 
York. The New York Department of State oversees appraisers and 
sets certain guidelines for their professional licensing. There 
is also a national organization, USPAP, which I can't remember 
the name, what the acronym stands for, but they also set best 
standards, best guidelines, best practices for appraisers on a 
nationwide basis.
    And in New York, for example, the guidelines of this 
appraiser association have set on a national basis--have just 
been codified into our State regulations. So there are--the New 
York State Department of State should be the ones who would be 
going after these appraisers and disciplining them.
    So, I only am aware of what is going on in New York, and I 
can't talk about it nationally.
    Mr. Prieston. Just to add to that, again, there is no 
better way to put a stop to deterrence and deterrence on a 
civil level where we can act fast and move quickly with a great 
deal more resources. If we have the legislation in place, we 
can act on behalf of the State as well as on behalf of the 
borrowers. Again, we do have those issues relative to----
    Ms. Lee. So would this be State legislation or national?
    Mr. Prieston. Well, it is a national issue as well as State 
level. It depends upon the type of transaction. You have FHA-
type loans, which, of course, you have Federal preemption 
involved--but then, of course, you have State level, case law. 
And there was case law in New York which created a necessity 
for privity of relationship between the appraiser and the 
lender. Otherwise, the lender can't sue the appraiser.
    Ms. McCall. I did have one other comment on that. And 
talking about the different State laws, what happens is there 
is this kind of national requirement for all appraisers in 
preparing appraisers. They need to construct them in a certain 
way. They need to make certain representations. And so that is 
very standard nationwide.
    However, State to State, the rules for becoming an 
appraiser, the experience that is required, the number of the 
bond--whether you need one or not--is different from State to 
State. And so it does make it difficult as a national lender to 
understand exactly what the experience level of your appraiser 
is. There are also different and varying degrees appraiser 
levels.
    Ms. Lee. Yes, I have wondered. In California, for example--
and I am from Oakland, the Bay area. I see--and I have often 
wondered if part of the high cost of housing and the median 
cost of the house--of course, in my district is now, what, 
$500,000. Could that be part of that be because of these 
inflated appraisals? I mean, after 6 months, another appraisal. 
I mean, I have seen houses go from 200,000 to 350 in 6 months 
from 350 to 500, and then all the other houses in that area go 
to 550 then in 6 months there, is one sold for 600. You know, 
so I know the appraisal process is part of this totally 
outrageous, the lack of affordable housing.
    Mr. Prieston. I am from the Bay area as well.
    Ms. Lee. See----
    Mr. Prieston. I can totally relate to what you are talking 
about. And the affordability issues of housing and how volatile 
that market is slowly becoming because of those extraordinary 
increases in value. We saw that during the dot.com era on the 
peninsula.
    The good news is the Bay area is one of the low areas as it 
relates to fraud and mortgage fraud. There is a good reason for 
that. It is because in the Bay area you have something called 
title companies that you have to go to--and you don't have 
settlement agents that are separate and distinct--or closing 
attorneys that are separate and distinct--that is why you don't 
have flipping occurring there.
    It is a very important distinction. When we go into those 
title insurance companies, guess what, the title insurance 
company is going to be liable if in the event there is a flip 
that is going to occur. So you don't see those transactions 
there. And that is why, comparatively speaking on the indexes 
and in our company where we receive claims around the country, 
it is the lowest area.
    Ms. Lee. But you see speculation though, you see the houses 
purchased for 200,000 and in 3 months they go on the market for 
500,000.
    Mr. Prieston. That may be something more due to an 
overheated market as opposed to fraud.
    Ms. Amiri. If I could add to that what we are seeing in 
Brooklyn is actually what you described in certain 
neighborhoods. The one-stop shops are now--have a large market 
share. And so what they are doing is they are using their sales 
to legitimize these astronomical prices in neighborhoods in 
Brooklyn that you would never imagine houses would be going 
for. So if you look at an appraisal from one of these one-stop 
shops, they are using comparable sales as a measurement of what 
they are going to sell your house for.
    Ms. Lee. And appraisals are so key though in developing the 
comparable sale criteria?
    Ms. Amiri. Right.
    Mr. Prieston. You are absolutely right. I mean, let us move 
the Bay area out of the question and bring it back to Brooklyn, 
where we all know about the sensitivities and the pain that 
many, many homeowners have undergone and borrowers that never 
should have owned four- to six-unit buildings in that area.
    Let us keep in mind that what Ms. Amiri said just now is 
exactly right. That what is happening is one is begetting the 
other. They start out with one fraudulent appraisal, and now 
you have 10. Now you have 10. And what they do is they keep the 
payments going for enough time so the loan remains current and 
alive, and therefore the value of the property stays 
consistent.
    Once you have one or two condominium complexes in Houston, 
hundreds of those just like that, for that very reason, in that 
same manner, you get two or three, you use the same $30,000 as 
a payment, you get an appraisal, you get one or get two, now, 
you get legitimate appraisers while looking at those comps and 
seeing that those are legitimate transactions.
    Now, it has been simply masked completely and almost 
undetectable if it goes on long enough. And the key here is 
letting it go on long enough. If those payments are made month 
after month with the proceeds of the first loans, then you can 
mask it for a year. And now you are beyond those early payment 
default detection programs that the industry knows about and 
can spot right away. And the whole thing implodes from about 18 
months to 2 years from the original funding dates.
    Ms. Trujillo. I also have something to add to that. What we 
see is that appraisals--and some of these older value 
appraisals are shifting a little bit, not only from mortgage 
brokers, but also to prime lenders, to regular lenders. And 
that appraisers are forced to meet the number. I mean, we, I, 
have worked in Oakland for 7 years before moving to L.A., and 
every single appraisal meets the price, especially for the 
purchase.
    Now, the only thing that we see is loan flipping, where 
appraisals meet the new price of the house, essentially high-
priced areas, where families are refinanced four to five times 
within the same year. Magically, the appraised value always 
keeps increasing at a crazy rate.
    Ms. Lee. Yes.
    Ms. Trujillo. It is something that we are looking at in 
general. Many of these cases involve fair housing violations, 
because they targeted specific demographics. And that is how we 
have been able to catch most of the actors and, also, you know, 
luckily, if a lender breaks any hope or risk of violation, that 
is also where we can get, dissect the whole case and figure out 
what happened. It is very regular, or, you know, normal now for 
appraisals to always meet the price.
    Ms. Lee. Thank you.
    Thank you very much, Mr. Chairman. I mean, this is mind 
boggling because as we try to make sure that the American dream 
is real for everyone in America, what--what we are seeing is 
that people are getting messed over, and their lives are being 
shattered. And the institutions that are supposed to support 
them really aren't. And, I mean, I hope we do have a further 
hearing on this, because somehow we have got to get a hand on 
this. Because otherwise no one will be able to buy a home in 
America.
    Thank you very much.
    Chairman Ney. Thank you. I want to thank the witnesses and 
members for being here today.
    Also without objection, there is a statement that Fannie 
Mae wants to put in the record, hearing no objection.
    [The following information can be found on page 126 in the 
appendix.]
    Chairman Ney. Also I would, without objection, the staff 
will be able to make conforming or technical changes to the 
language, and also some members may have additional questions 
for the panel. They may want to submit them in writing. Without 
objection, we will keep the hearing open for 30 days for 
members to submit and receive answers.
    I want to thank you again for your patience.
    Thank you very much.
    [Whereupon, at 1:12 p.m., the subcommittee was 
adjourned.]

                            A P P E N D I X



                            October 7, 2004

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